Is Car Leasing Worth It for Businesses?
Whether leasing is worth it depends on how your business uses its cars. For many it is, but not for all. This guide sets out the options fairly, including when buying wins. It is general information, not financial or tax advice, so take your own accountant's view.
The options
- Contract hire (leasing). You pay a fixed monthly rental to use a new car for an agreed term and mileage, then hand it back. You never own it.
- Buying outright. You pay the full price from your own funds and own the car.
- Hire purchase (HP). You borrow to buy the car and pay it off over a term, and you own it at the end.
- Personal contract purchase (PCP). A form of finance with a final payment that lets you keep the car, and mostly a consumer product. It is less common for business use.
Where leasing is strong
No depreciation risk. New cars lose value quickly. With leasing, that risk sits with the funder, so what the car is worth in three years is not your problem.
Fixed, predictable costs. The monthly rental does not change. You know the cost of the car for the whole term, which makes budgeting simple.
Cash stays in the business. You are not tying up a large sum in an asset that loses value, so the money is available for stock, wages or growth.
Always a newer car. At the end of the term you can move into a new car, normally under the manufacturer's warranty for much of the term.
No resale hassle. You return the car. There is no advertising, haggling or part-exchange.
VAT
When you buy a car, a business can usually not reclaim the VAT on the purchase price unless the car is used purely for business. With leasing, a VAT-registered business can usually reclaim 50% of the VAT on the rentals where the car has any private use. That is not the whole picture, and the rules depend on how the car is used, so check the detail with your accountant.
Accounting treatment
You may have heard that leasing keeps cars off the balance sheet. Do not assume that. Accounting standards have changed, including IFRS 16 and updates to FRS 102, and many leases are now shown on the balance sheet. How a contract hire agreement is treated depends on your business and the standard you use, so ask your accountant before you rely on it.
When buying wins
Leasing is not always the answer:
- Very high mileage. Excess mileage charges can be costly, and buying may suit a car that covers far more than a typical lease allows.
- You want to own the car. If you want to keep a car for many years, or modify it, ownership may make more sense.
- You are happy to carry the risk. If you keep cars a long time and spread the cost, buying can work out well.
- Strong cash position. If you have spare cash and a use for the asset, buying avoids finance charges.
HP can suit a business that wants to own the car at the end but not pay the full price at the start. Our guide to contract hire vs lease purchase explains the difference.
The balanced view
Leasing tends to suit businesses that want fixed costs, a newer car, and no resale risk, and that stay within sensible mileage. Buying tends to suit those who want ownership or cover very high mileage. Work out the total cost over the period you would keep the car, and include VAT, finance, running costs and what the car would be worth at the end.
Next steps
Our business car leasing page covers who can lease and how VAT works, and the car leasing page explains the basics. When you are ready to compare, see the latest deals. To understand how prices are built, read how to calculate car lease costs.
Swiss Vans Ltd is authorised and regulated by the Financial Conduct Authority as a credit broker, not a lender. FRN 668283.