Business Car Finance – FAQs

Many businesses take advantage of car finance to acquire the vehicle essential to their day to day operations.

But there are many different types of car finance available and some may be more appropriate than others depending on the type or types of vehicle you need and the uses to which they may be put by your business.

So, here are some of the frequently asked questions received by business car finance providers on the subject.

What is the appropriate form of finance for cars for general business use?

Many of the cars used by your business are likely to serve all manner of purposes – general workhorses used so that team members may get from one place to another, to attend meetings, deliver small packages, and even to enjoy their private use out of office hours.

If you want to make no mistake that the vehicles are being purchased for the business, as assets that appear on the company balance sheet, you might want to consider hire purchase.

After payment of an initial deposit – typically around 10% of the purchase price – hire purchase lets you spread out the repayments over the term of the HP agreement, with ownership transferring to your business once the final instalment has been paid.

I want a reliable car for business use for a limited period only – what is the appropriate form of finance?

If your business use of the car is likely to be relatively short-term – for, let’s say, just three years – and you need a reliable mid-range vehicle for that purpose, a lease agreement may be the appropriate option.

The advantages of leasing are that you are not buying a business asset, but simply paying an agreed monthly rental for its lease – and those payments may be written off as an operating expense of your business, so saving you tax.

Although this option may be a straight forward lease agreement, some forms of finance lease also allow you to share in the economic returns received by the lease company when its asset is sold.

Our company director wants a smart executive car – what is the appropriate form of finance?

This is a car which is likely to be used not only for business purposes but as your director’s personal vehicle for private use too.

In that case, the most appropriate form of business car finance might be a Personal Contract Purchase (PCP) in his own name.

An initial deposit is required and thereafter equal monthly instalments are paid based on the estimated depreciation of the car over the term of the PCP – in other words, you are paying only around two-thirds of the value of the car.

At the end of the PCP (between 3 and 5 years), you have the option to purchase the car at its Minimum Guaranteed Future Value (MGFV) or return it to the finance company and pay nothing more.

Following changes in the rules applied by HM Revenue & Customs (HMRC), AM Online on the 2nd of October 2018 revealed that PCPs may be treated as “supply of services” rather than “supply of goods” transactions – since many participants opt not to make the final balloon payment and instead hand back the car for re-sale. As a sale of services transaction, you only pay VAT on the payments you actually make and not on the whole value of the vehicle – a potential saving.

Only if the GMFV is set unrealistically low, are you going to leap at the chance to buy the car at the end of your PCP, then sell it for a profit, and pocket the difference.

Please note that these business car finance FAQs are for informational purposes only and should not be taken as specific advice. To find the most appropriate business car finance option for you, please contact us for a no-obligation discussion.