How it works
For businesses looking for the tax benefits of contract hire with the risk and reward benefits of outright purchase, finance lease offers a best of both worlds approach.
There are two different types of finance lease agreements – either a fully amortised lease or a balloon lease. In both cases the fleet pays for the entire cost of the vehicles either the course of the agreement without any additional services provided and taking into account the pre-agreed anticipated resale value of the vehicle. And in both cases the vehicles appear on your balance sheets.
Under a fully amortised lease – which is typically more common – you pay back the entire capital cost of the vehicle plus charges as a monthly fee over the contract period.
With a balloon lease, you pay a reduced monthly payment and make a balloon payment at the end of the agreement.
Whichever you choose, the full resale value risk is retained by your business. If the resale value is less than agreed, you are responsible for the deficit but if it’s more than you benefit from the difference.
As with contract hire, VAT-registered businesses can claim back 50% of the VAT on the finance rental where there is an element of private use or 100% if it is used exclusively on work purposes.
Rentals paid on vehicles with CO2 emissions up to 50g/km can also be fully deducted against corporation tax – this drops to 85% for vehicles with higher emissions.
At the end of the agreement, the vehicle can be disposed of to a third party or returned to us, with a further option for you to extend the agreement. As you are bearing the risk of the resale value, there are no penalties for excessive mileage or wear and tear.