FAQ's

Finance Explained


Contract Hire


If your business is looking for a comprehensive, fixed cost motoring package where full usage of a new vehicle is important but ownership is not, then you should consider contract hire.

This is essentially an operating lease, which enables you to drive a new vehicle of your choice on a “fully inclusive” basis. Maintenance can be included as part of the contract, leaving you with only fuel and insurance to consider as extras. As you are hiring the vehicle as opposed to buying it, at the end of the contract you simply hand the vehicle back, leaving you with no disposal worries (subject to mileage and condition).

Contract Hire is also an extremely tax efficient method of funding a business vehicle, as rentals may be offset against taxable profits. For cars with a retail price of up to £12,000, full tax relief is available. However, where a car has a retail price in excess of this sum, tax relief is restricted in accordance with the following formula known as “half the excess rule” although full relief may be claimed on any maintenance element of the rental:

Disallowed percentage of rental = 1/2 (Vehicle cost - 12,000)*100/ Vehicle Cost

Additionally, if your business is registered for VAT, 100% of the VAT payable on the finance element of the rentals may be recovered where the vehicle is either a van or a car used solely for business purposes. Where the vehicle is a car used for business and private mileage, then only 50% of the VAT payable on the finance may be recovered.

Key Benefits


  1. A low initial outlay, usually 3 months advanced rentals
  2. Contracts available for periods of 1 to 4 years depending on the vehicle usage
  3. Monthly rentals are pre-determined for the entire contract period
  4. Known additional charge if the contract mileage is exceeded
  5. Road Fund Licence is included with the contract
  6. Full maintenance may be included as part of all contract hire agreements
  7. As the vehicle is simply returned at the end of the contract, there are none of the problems or risks associated with disposal
  8. If registered for VAT your business may reclaim all, or some of the VAT payable on the finance element of the rentals
  9. This form of funding is considered to be “off balance sheet” and the vehicle will not be shown as an asset within the company’s balance sheet

Finance Lease


For a business requiring the combination of a minimal outlay with maximum tax efficiency, Finance Leasing provides an alternative to contract hire. Although the business will never actually own the vehicle, finance leasing allows many of the benefits associated with ownership available to the business, while at the same time offering significant tax advantages.
only, if your business is registered for VAT, 100% of the VAT payable on the finance element of the rentals may be recovered where the vehicle is either a van or a car used solely for business purposes. Where the vehicle is a car used for business and private mileage, then only 50% of the VAT payable on the finance may be recovered.

For the duration of the Finance Lease agreement, the vehicle will be shown as a 'leased asset' within your balance sheet. Rentals are treated as a revenue expense and may be offset against your taxable profits. Furthermore, rentals can be tailored to match the cash flow of your business, with a “balloon” rental being used to defer part of the vehicles initial cost.
only, if your business is registered for VAT, 100% of the VAT payable on the finance element of the rentals may be recovered where the vehicle is either a van or a car used solely for business purposes. Where the vehicle is a car used for business and private mileage, then only 50% of the VAT payable on the finance may be recovered.

If your business is registered for VAT,100% of the VAT on the Finance Lease may be recovered where the vehicle is either a van or a car used solely for business purposes. Where the vehicle is a car used for business and private mileage then only 50% of the VAT payable on the finance element of the rentals may be recovered. At the end of the agreed lease period, the vehicle is sold and the proceeds are used to clear any “balloon” payment. If the sale proceeds do not cover this amount, then the lessee must make up the shortfall. Should the proceeds exceed the “balloon” then the difference will be refunded as rebate of rentals.
only, if your business is registered for VAT, 100% of the VAT payable on the finance element of the rentals may be recovered where the vehicle is either a van or a car used solely for business purposes. Where the vehicle is a car used for business and private mileage, then only 50% of the VAT payable on the finance may be recovered.

Key Benefits


  1. Low initial outlay, usually 3 months advance rentals
  2. Rental patterns tailored to suit the cash flow needs of the business and a “balloon rental” that will have been agreed between the lessee and lessor
  3. Road tax is included for the first year
  4. Rentals may be offset against taxable profits, improving the cash flow and taxable position of the business
  5. Where sale proceeds of the vehicle exceed the ”balloon rental”, the difference is returned as a rebate of rentals

Hire Purchase


Hire Purchase is a simple and effective way for private individuals and businesses to spread the cost of a new or used vehicle.

Pay a small deposit (10-20%) to suit the available capital, and then make monthly repayments over an agreed period of time (24/36/48/60 months). Once all the payments have been made along with the option to purchase fee (approx. £50 - £100) then the customer acquires title to the vehicle.

If you are a business user, all of the interest on your payments is allowable against tax, additionally a proportion of the vehicle value can be written down against your profits.

Key Benefits


  1. Eventual ownership – control of usage and disposal
  2. Eases cash flow, budgeting and planning – known outlay that will not change
  3. Leaves other credit lines undisturbed
  4. Interest charges allowable against taxable profits for business users
  5. Tax relief (capital allowances) – reduces tax bill for business users
  6. Capital released – leaves money available to develop other parts of the business

Lease purchase


Lease Purchase is similar to Hire Purchase, but offers your business a number of advantages. Like hire purchase you pay a low deposit then make the remaining payments at a fixed rate over an agreed period, usually two or three years. However, with Lease Purchase you reduce your monthly payments significantly by choosing a final balloon payment. This balloon payment is based on the car's estimated resale value at the end of the agreement and is taken into account when the payments are calculated, making them lower than a traditional Hire Purchase agreement. When you pay the final balloon payment you complete the agreement and own the vehicle, which is yours to do with as you wish.

Lease Purchase monthly payments do not attract VAT, making this scheme particularly attractive to non-VAT registered businesses. All of the interest on your payments is allowable against tax. Additionally, a proportion of the car's value can be written down against profits.

Key Benefits


  1. Lower monthly payments
  2. Lower initial payments
  3. Improves cash flow. Retains all the benefits of Hire Purchase
  4. Final payment made from sales proceeds
  5. No VAT on the payments

Personal Contract Hire


Features of Personal Contract Hire:


  1. A Hiring Agreement where the vehicle remains the property of the Finance Company
  2. The vehicle is disposed of by the Finance Company at the end of the contract
  3. The contract is set for a period usually between 2 & 4 years
  4. The contract is for a set mileage
  5. The customer pays a fixed monthly rental that will always include:

    • Cost of vehicle funding
    • Cost of vehicle depreciation
    • Road Fund License
    • For an additional Rental the customer can include the following options:
    • All Maintenance, Service, Repairs, Tyres and Batteries*
    • Relief Vehicle provision
    • Recovery service
    • *Accidental damage, driver abuse and glass breakages are normally excluded

Advantages

  1. Fixed cost motoring: The Customer only has to bear the direct costs for fuel and vehicle insurance, plus Excess Mileage charges if the vehicle exceeds the Terminal Mileage figure
  2. Reduced Administration
  3. No responsibility for vehicle disposal
  4. Low initial outlay
  5. Low monthly outlay
  6. Finance charged on VAT exclusive price of new and qualifying cars

Disadvantages

  1. No equity on the vehicle at the end of the contract
  2. VAT on rentals, only 50% of which is reclaimable
  3. Vehicles do not appear on the balance sheet

Personal Contract Purchase


Personal Contract Purchase can be used by any individual, whether in business or not and essentially works in the following way: first you select the vehicle that's right for you, then decide which agreement term to go for…this is either 2 3 or 4 years. Next, simply estimate the mileage you expect to cover each year and choose a deposit you are comfortable with, including the anticipated value of any part-exchange. We would recommend that you aim to put down between 10% and 20% of the 'On the Road' RRP.

The manufacturer will forecast the future value of the car you've chosen and this is known as the Guaranteed Future Value or GFV. The GFV is the minimum value you can expect your car to be worth at the end of the PCP agreement, provided it is within the agreed mileage and in good general condition.

With PCP your monthly payments are fixed and will be less than with Hire Purchase Plans taken out over an identical term. This is because the GFV and deposit are deducted from the 'On the Road' RRP and payments are based on the remaining balance plus interest.

At the end of the agreement you can drive away in another brand new vehicle and this is the route chosen by many of our customers. Should you wish, you also have the option of paying the GFV (balloon payment) and keeping the vehicle or you may return it to the manufacturer with nothing further to pay.

Key Benefits

  1. Low initial deposits
  2. Ideal for opting out from the company car (no company car tax)
  3. Low monthly payments
  4. Option to purchase or return at the end of the agreement
  5. Ability to change to a brand new vehicle on a regular basis

Jargon Explained



APR


APR stands for annual percentage rate. It's a calculation that allows consumers to benchmark the cost of borrowing. In general the lower the APR the better, although there are factors like whether the APR is variable or not to consider and whether you are comparing like for like. This means if you are comparing a remortgage APR with a Hire Purchase APR you do not get a true comparison as they are different types of loans.

APR takes into account the amount of interest you pay and any other fees charged by the provider such as arrangement fees for setting up the loan. It also takes into consideration when and how often interest and charges must be paid.

Balloon Payment


This is the final end payment, usually on a lease purchase or Personal Contract Purchase. It is used to get lower monthly payments as you are not paying off all the value of the car or van. The value is set based on the mileage per annum you choose.

BIK


Benefit in kind is the term used by the Inland Revenue to assess the tax liability you have on a company benefit such as car or fuel allowance. If a company car is provided by an employer the employee is required to pay tax on its value. From April 2002 this is calculated using the P11D value of the vehicle, the CO2 rating of the vehicle and the tax band of the employee (23% or 40%).

CO2


This is the emission rating of a vehicle expressed as grammes per km. In general the lower the emissions the more environmentally friendly the car is and therefore the lower the tax liability to the driver.

Depreciation


This is the amount of value your vehicle loses and is affected by mileage/age/condition.

Disallowable/Allowable VAT


If a vehicle is funded using Contract Hire or A Finance Lease and is used for personal use, the company can only claim back half the VAT on the rental payment. The portion of VAT you can't claim back is the disallowable VAT. All the VAT can be claimed back on the maintenance of the vehicle.

Early Termination


This is when you cancel a finance agreement before it is due. Contract Hire agreements are for a fixed term and incur heavy charges for cancellation. Hire purchase ,personal contract purchase and lease purchase are much more flexible and easier to settle.

Effective rental


This is the actual cost of a rental which takes into consideration the disallowable VAT element of a Contract Hire or Finance Lease agreement. I.e. on a rental of £100 plus VAT i.e. £117.50 total inc VAT you could reclaim half the VAT leaving the effective rental at £108.75.

Excess mileage


Certain finance agreements have an excess mileage charge. This is expressed as PPM (Pence Per Mile) and is charged when your vehicle exceeds the agreed mileage. This can be pooled when multiple agreements are taken out. For example, 2000 miles over at the end of the agreement at 10p per mile = £200.00 excess mileage charge for you to pay.

Final Payment


(see balloon payment)

Guaranteed Minimum Final Value


This is an agreed value that is found at the end certain finance agreements, typically personal contract purchase agreements. It means that you do not have to worry about the residual value in the future. The figure is agreed taking into consideration the length of agreement and the quoted total mileage.

Imported Vehicles (Parallel /Grey)


Parallel imports are vehicles that have been imported to the UK from Europe to the UK Specification or similar, Grey imports are none UK models, often imported from Japan etc. The warranty and final specifications of these cars will be different to a UK model and the residual values will be less. (please note, we do not sell this type of vehicle)

Initial Payment / Rental


This is the first payment you make on an agreement before the car is delivered, like a deposit.

OTR


On The Road price, this is the final invoice value of the vehicle, including road tax and delivery to the dealer. Contract hire agreements do not have an on the road price as you are only in effect renting the car from the owner (the finance company)

Off Balance Sheet


If a vehicle is funded on Contract hire for example, it does not show as an asset on the company's balance sheet. It shows as a cost in the profit and loss account, therefore offering a tax saving in most circumstances. Please seek professional advice on this subject from an accountant.

P11D Value


As a company car driver you are responsible for paying income tax on your benefit. The is the amount that that the Inland Revenue use to work out your taxable benefit. The value is calculated by adding the list price and any extras (both dealer fitted and factory fitted) together but excludes the Road Fund License and First Registration Fee (£25.00).

PPM


Pence per mile ? If you have an agreed mileage amount on your contract, any excess will be charged by the mile.

Pooled Mileage Agreement


As a business running a large fleet you may wish to group or Pool the mileage of your cars. This helps keep the overall running costs down, for example one driver may do 10,000 miles under the agreed amount, another may do 10,000 miles over. If pre-arranged with the finance company you could stop any further charges by netting one of against the other.

Terminal Pause (Terminal Rental)


This refers to a payment profile for your contract or agreement such as 3+33 or 3+21. Basically, the two amounts add up to the period of the agreement, and because you pay two extra payments up front, you have a two month payment free period at the end. This allows you to allocate funds for your next 3 advance payments when you change your car.

Reduced Spread (Spread Rental)


This is how most contract hire agreements are marketed, it is a way of keeping the monthly payment down to a minimum. For example a three year Reduced Spread would be shown as a 3+35, making a total of 38 payments.

Residual Value


This is the amount a vehicle is worth at a pre-determined time, for example at the end of a contract or finance agreement.

RFL


This stands for Road Fund Licence, or road tax as it is commonly known as.

VAT Qualifying Vehicle


If for example a vehicle is purchased by a contract hire and leasing company for the sole purpose of renting it out to a customer, the vehicle is classified as a VAT qualifying vehicle. The purchaser of the vehicle claims the VAT back and when they sell it at the end of its life with them, it is value is plus VAT. This is common on six month old cars that are being re-marketed on contract hire