Short Term Car Lease Listing | Lease Exchange | Early
Termination | Contract Hire Agreement
UK Car Leasing Advice
To help you work out which package is the best
for you, HM Customs and Excise recognize only two types of funding;
A Purchase agreement is where the customer
has the right to obtain legal title to the vehicle. (Supply of
Goods)
A Hire agreement is where the customer has no
option to gain legal title to the goods. (Supply of Services)
The following will give you a brief explanation
of the different funding options we offer. We recommend that
before you make your final selection that you discuss the matter
with your accountant to ensure that you are selecting the correct
package for your individual needs. At the end of this section
we have prepared a quick reference matrix to allow to the different
compare funding options.
Contract Hire (Hire Agreement)
Contract Hire is simply a method of hiring motor
vehicles for use over an agreed time and mileage without ownership,
the monthly rental is fixed (often referred to as an Operating Lease).
This can include a range of additional services such as servicing,
maintenance, tyres and road fund licence . This method of
funding is a popular choice for VAT Registered companies, with more
than 40% choosing this method. The term of the contract can
range from 12 to 48 months and usually up to 120,000 miles.
What are the Benefits?
Off balance sheet funding
Consistent and accurate budgeting
Improved cash flow
Fixed interest rates
Fixed cost maintenance available
Low initial outlay
Minimum capital expenditure
VAT Recoverable on monthly rentals (1)
No depreciation risk - underwritten by finance
company
No disposal risk
Reduced administration costs
Rentals allowable against taxable income (2)
(1) You can only claim 50% of the VAT on the Finance element if
you are using the car for private use, 100% if it is business use
only (e.g. Pool car). All the VAT is recoverable on the Maintenance
element as this is a business expense.
(2) If the List price of your vehicle is more than £12,000.00
the amount that can be allowed against tax is reduced, if it is
less 100% can be allowed, this is called the half excess rule, see
example below:
A Finance Lease is a product for VAT registered
companies who prefer a flexible rental agreement, the ownership
stays with the finance company but you bear at least 90% of the
residual risk or reward at the end of the agreement.
For your tax purposes, a finance lease is a contract
where the car is hired, and there is no pre-planned opportunity
to purchase the car. The title of the goods, like contract hire,
can never be passed onto your company. The agreement shows
on the balance sheet as a leased asset with a corresponding liability.
There are two types of Finance Lease generally
available to you. The first is a Residual Value Lease, this
provides fixed monthly payments over the period of the contract
followed by a 'balloon payment'. The second is a 'fully Amortised
Lease', on this type of lease the monthly payments account for the
entire value of the vehicle over the contract period.
What are the benefits?
Improved cash flow
Consistent and accurate budgeting
Fixed interest rates
Low initial outlay
Minimum capital expenditure
VAT Recoverable on monthly rentals (1 - As
above)
Reduced administration costs
Rentals allowable against taxable income (2
- As above)
Vehicles shown on the balance sheet
Opportunity for a third party to buy the vehicle
at the end of contract
Business Contract Purchase (Purchase agreement)
This funding method combines the fixed prices and
operational benefits of contract hire, however it allows you to
own the vehicle at the end of the term at a pre-determined payment
(balloon payment). The balloon payment is set to represent
the residual value of the vehicle based on the mileage and term
length stated. If you do not want to purchase the vehicle
at the end of most contracts you can hand it back to finance company
and have no further cost as long as it is within the mileage and
condition terms.
The vehicle will appear on your balance sheet as
an asset and is suitable for high value vehicles over £12,000
as it avoids the whole question of restricted tax recovery that
are found on Hire agreements.
Improved cash flow
Consistent and accurate budgeting
Capital allowances available
Fixed interest rates
Low initial outlay
Minimum capital expenditure
No VAT on finance repayment
Reduced administration costs
No risk for depreciation
No vehicle disposal issues at end of contract
Vehicles shown on the balance sheet
Opportunity to buy the vehicle at the end of contract
Hire and Lease Purchase (Purchase agreement)
This is the traditional method of funding a new
vehicle, it is a straight forward finance agreement where title
passes to you when all payments have been made. The purchase
VAT can not be reclaimed unless your vehicle is being used for 100%
business use. After you have paid an initial payment (deposit),
the balance of the purchase price, plus charges are repaid over
a fixed period by fixed monthly payments. Unlike Hire Purchase,
Lease Purchase has a balloon payment that is set to represent the
anticipated value of the vehicle at the end of the term. With
both of these agreements, the risk of resale value, repairs and
maintenance lies with you.
What are the benefits?
You gain ownership of the vehicle
The vehicle appears on your balance sheet
as an asset
You claim the write down allowance
No VAT on monthly payments
Minimum capital expenditure
VAT Can be recovered on purchase price
if vehicle is used for business purposes only
VAT Can be recovered on the running costs
Personal Contract Hire (Hire agreement)
Personal contract hire is a new product that has
been designed for you if you are opting out of a company car scheme
and have a company car allowance or just want fixed cost motoring.
PCH is a budget friendly alternative to traditional funding methods
such as a personal loan or hire purchase. You can get your
vehicle without the need for a large deposit, you simply hire the
car for a fixed period and at the end, hand it back to the finance
company.
To help you plan your budget further you can include
a full maintenance package, this can include servicing, general
repairs, tyres and road fund license. This only leaves you
to sort out your insurance and fuel costs. Please note that
if you are using the car for business use you will need to notify
your insurance company.
What are the benefits?
Consistent and accurate budgeting
Low initial outlay
Fixed interest rates
Fixed cost maintenance available
No depreciation risk - underwritten by
finance company
No disposal risk
No final payment
Road fund license is often included
Personal Contract Purchase (Purchase
agreement)
Personal Contract Purchase or PCP is another flexible
way to finance the vehicle of your choice, offering motoring at
a fixed cost - so you know, each month, exactly what you are paying.
You can choose the car and the contract that suits your needs.
You decide the type of vehicle you want, how long you want to keep
it for and your anticipated mileage. After this period, you
can either pay the pre-agreed 'balloon' payment - which is based
on the expected value of the vehicle - and keep the car, or simply
hand it back.
What are the benefits?
Consistent and accurate budgeting
Low initial outlay
Fixed interest rates
Fixed cost maintenance available
No depreciation risk - underwritten by
finance company
No disposal risk - option to hand car
back at end of term
Ownership at end of contract if required
Road fund license is often included
Used vehicles are available on this scheme
The information provided is for guidance
only. We recommend that you seek professional advice from your accountant
and tax office before making a decision based on the information
given.
Inland
Revenue has a guide to personal and company taxation which
will be helpful to you.
Disclaimer: No legal liability is accepted for
the information given is as it has been provided for illustration
purposes only and is correct to the best of our knowledge at the
time of publication. It is your responsibility to check the validity
of this information and the latest version with the relevant authorities.
Glossary of Terms
Advertising fee
A fee that an car dealer charges an car buyer
to pay for advertising costs.
Amortization
Amortization is the gradual reduction of loan
principal that occurs as you make periodic loan payments. Generally,
the loan principal is completely amortized with the final payment.
As you pay back the loan, an increasing amount of each payment
is applied to principal and a lesser amount is applied to interest.
Amortization is also a process of spreading a cost that is incurred
upfront over the term of the loan or life of the asset.
Annual percentage rate (APR)
The real cost that you pay to borrow, stated
as a yearly percentage of the loan amount. This is sometimes
called your effective borrowing cost. For car and mortgage loans,
closing costs and discount points are added to calculate APR.
For example, if you pay £500 in closing costs to obtain
a £10,000 loan, the APR will be higher than the interest
rate since you are effectively borrowing £9,500 but will
owe £10,000. The Financial Services Act OFT
APR CALCULATION requires the lender to disclose the APR
to you. For credit cards, the annual fee is often not included
in the APR calculation. As a result, an APR of a credit card
is often its simple interest rate.
Appraisal
Appraisal is the process of estimating fair
market value of an asset. Appraisals are routinely required
for real estate transactions. An appraiser should be a certified
professional. He or she should be an independent party to the
transaction in order to avoid potential conflict of interest.
Real estate appraisers use methods that are common in local
practice. Comparable-sales method is widely used to appraise
real estate.
Average yearly cost
The average yearly cost of owning a vehicle
includes depreciation, operating expenses, and financing charges.
Depreciation is the yearly charge that reduces the book value
of a vehicle (and your trade-in value). Operating expenses include
maintenance, fuel and related expenses. Financing expenses includes
the interest paid on an car loan or lease.
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. The value is set based on the mileage per
annum you choose.
Base price
Price of a car that includes standard equipment,
basic warranty and delivery charges but excludes optional features.
Base price is printed on the Dealer sticker.
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 it's 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%).
Capitalized cost
Car leasing term that is synonymous with the
sale price of the Car.
Capitalized cost reduction
Car leasing term that is synonymous with the
down payment you make on a new car loan, or the trade-in value
that you receive.
Closed-end lease
A closed-end lease is a lease that establishes
residual value of the leased vehicle and any future fees at
the beginning of the lease term.
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.
Collision insurance
Insurance that pays for damage to your car
sustained in a collision.
Comprehensive insurance
Insurance that pays for damage your car sustains
in an event other than a collision (e.g., theft, vandalism).
Cost-benefit analysis
An analysis that compares the cheaper of a)
borrowing money to buy a car and paying the interest, with b),
paying cash for a car, and losing the opportunity to earn a
rate of return on the savings applied to the purchase.
Dealer charges
Amounts charged for features sold separately
by car dealers, such as rust-proofing, undercoating or services
offered in extended warranties.
Dealer holdback
An allowance that Carmakers give dealers that
is worth about two to three percent of an Car's MSRP. A holdback
allowance allows a dealer to pay the maker an amount less than
the invoice. This allows the dealer to record a profit by suggesting
he paid invoice price for the car when, in fact, he has paid
less.
Dealer incentives
Programs offered by carmakers to boost sales
of less popular models and reduce inventories. Dealers decide
whether to pass the savings to customers.
Dealer invoice
Amount that carmakers charge dealers for vehicles,
including options.
Dealer sticker price
The Dealer sticker price plus a suggested
markup for dealer-installed options.
Depreciation
Depreciation is the systematic reduction of
book value over time due to wear and tear and obsolescence.
Some equipment types depreciate faster than others. If a piece
of equipment has a high book value, it suggests that its depreciation
rate is lower than one vehicle with low book value. Depreciation
is also used to calculate the residual value of leased equipment.
Depreciation expense is a non-cash expense that creates tax
savings.
Destination charge
A fee not marked-up by the dealer that is
paid by the consumer for shipping and dealer-delivery costs
of an Car.
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.
Down payment
A down payment is the cash you deposit towards
the purchase of a home, business property, or vehicle. The larger
the down payment, the less you need to borrow. For home loans,
a down payment of 20% of the home purchase price is generally
required to avoid private mortgage insurance. The value of a
trade-in vehicle is often used instead of a down payment for
purchasing a 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. Ie on a rental of £100
plus VAT ie £117.50 total inc VAT you could reclaim half
the VAT leaving the effective rental at £108.75.
Escrow
The process of using a third party to handle
the exchange of funds between buyer and seller in a real estate
transaction. The escrow company is a fiduciary. Some states
may use attorneys in lieu of escrow companies. Funds are deposited
in an escrow account that neither the buyer nor seller can access.
The escrow agent ensures that buyer and seller pay appropriate
funds at loan closing.
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)
Gap protection
IInsurance that covers the amount owed due
to early termination of a lease agreement. Such early termination
may occur when a car is stolen or seriously damaged in an accident.
However, the car insurer's payment may not be enough to pay
off the lease balance and any early-termination penalties.
Gross income
The IRS defines gross income as all income
that is not exempt from tax. It may be received as money, goods,
property, or services.
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.
Home equity line of credit
A home-equity line of credit is a form of
revolving credit. This means you can borrow an amount up to
but not exceeding a pre-approved credit limit. A home-equity
line of credit is secured by the residual equity in your home.
To calculate equity, subtract mortgage debt from your home value.
Home equity lines allow a homeowner to make repairs or other
home improvements, refinance other debt, or use for general
purposes. Unlike a home-equity loan, payments are flexible and
may consist of interest-only payments.
Home equity loan
A home equity loan is a mortgage loan that
is secured by the residual equity in your home. To calculate
equity, subtract mortgage debt from your home value. Home equity
loans allow a homeowner to make repairs or other home improvements,
refinance other debt, or use for general purposes. Unlike a
home-equity line of credit, a home equity loan is an amortizing
loan.
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.
Interest rate
Interest rate is the cost of borrowing money
as a yearly percentage. For investors, interest rate is the
rate earned on an investment as a yearly percentage. The simple
interest rate is interest paid or received divided by loan or
deposit. For example, £100 in annual interest on a £1,000
loan or deposit is a simple interest rate of 10%. Compounded
interest rate is determined by the frequency of interest payments
during the loan or deposit term. For example, a 10% loan or
deposit that is compounded quarterly equals a compounded rate
of 10.38%. If compounded daily, the compounded interest rate
increases to 10.52%. (For CD investors, compounded interest
rate is called annual percentage yield.) Effective interest
rate, or annual percentage rate (APR), is the true interest
cost of borrowing. It includes fees and points you pay for a
loan in the calculation. As a result, effective interest rate
is higher than simple interest rate.
Interest rate adjustments
Interest rate adjustment is the amount of
change, in basis points, that the base interest rate on a variable-rate
loan changes. The interest rate is usually adjusted once a year,
on the adjustment date, to reflect changes in the base rate.
There are one hundred basis points in one percentage point.
The interest rate on a variable-rate loan is the sum of a base,
or index, rate and a spread to reflect the credit risk of the
borrower.
Interest rate lock
Also called a rate lock, an interest rate
lock is a temporary guarantee that the interest rate that a
lender quotes you will not change. It protects you from the
chance of an increase in your borrowing interest rate. Lenders
may charge you a small fee to give you an interest rate lock.
Although rate locks are usually for 30 days, a lender may be
willing to offer a longer period in exchange for a larger fee.
Invoice price
The carmaker's base charge to a dealer, which
includes a freight charge (often called a destination or delivery
charge).
Liability insurance
Protects a policyholder when he or she is
responsible for personal injury or property damage.
Lien
A lien is a legal claim held by a creditor
against an asset to guarantee or secure repayment of the debt.
Mortgage liens are regularly used in real estate lending as
collateral for a loan.
Loan application
A preliminary step in obtaining a loan. A
loan application tells the lender how much the applicant wishes
to borrow and how the loan proceeds will be used; lists personal
income and assets; describes work history; and authorizes the
lender to receive a credit report to assist in making a lending
decision.
Loan-to-value ratio
Homes: Loan-to-value ratio is a key factor
in determining how much of a home you can qualify for. To calculate,
divide the mortgage loan amount by the fair market of the home
value. A recent appraisal is generally required to determine
fair market value. If you have existing mortgage debt or are
adding debt, divide the combined mortgage balance by the home
value. For example, a mortgage loan of £150,000 on a home
that is appraised at £200,000 has an LTV of 75%. As a
general rule, mortgage loans that exceed an LTV of 80% require
private mortgage insurance.
Manufacturer's rebate
A money-back program that Car makers offer
consumers directly to boost sales of less popular models and
to reduce inventories.
Money factor
Money factor is a leasing industry term that
is synonymous with interest rate.
Dealer sticker price
Label affixed to the window of an car that
discloses the Car's base price, installed options, MSRP, freight
charge, and fuel economy (mileage).
MSRP
Acronym for Manufacturer's Suggested Retail
Price, which is an Car's recommended selling price. Most options
are not included in the MSRP.
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.
Open-end lease
A lease term that requires the lessee to pay
the difference between residual value and fair market value
at the end of the lease term if the fair market value is lower.
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)
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.
Preparation charges
Charges imposed by a dealer for preparing
a newly purchased car for delivery to the buyer. These include
fueling and servicing the car and any cosmetic changes made
just prior to sale.
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 over all 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.
Reconditioning reserve
An car leasing term synonymous with security
deposit. The lessee gives the lessor a reconditioning reserve
in the event a leased Car's condition deteriorates to a point
where reconditioning is necessary.
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
Residual value is the value of a leased vehicle
or other equipment at the end of the lease term. Residual value
is the fair market value of the leased equipment. It is the
price the lessee pays to buy the equipment if they exercise
the purchase option.
Revolving credit
Revolving credit is a type of open-end credit.
Open-end credit allows the borrower to borrow funds from the
loan as long as it does not exceed the credit limit of the borrower.
In some cases, lenders require minimum payments or impose a
clean-up period. These steps ensure that the borrower continues
to have the means of repaying the debt.
RFL
This stands for Road Fund License, or road
tax as it is commonly know as.
Savings interest rate
The savings interest rate is the yearly interest
rate you earn on your savings. It is also used to calculate
the opportunity cost of paying with cash. In contrast, the saving
rate is the percentage of income you save.
Tax savings
Tax savings are the amount you may save in
taxes from a tax deduction or credit that you would otherwise
pay if you did not have the deduction or credit. Tax savings
are also called a tax shield. To calculate tax savings from
a deduction, multiply the amount of the deduction by your marginal
income tax rate. At an income tax rate of 25%, a £2,000
qualified contribution to a company retirement plan may save
you £500 in taxes. And if you paid £10,000 in home
mortgage interest, you may save up to £2,500 in income
taxes if you are in the same tax bracket. Your deduction for
interest expense on mortgage and home equity debt may be limited.
You may wish to consult a financial or tax adviser. For businesses,
tax savings are realized on such deductible expenses as lease
payments, interest on loan payments, and depreciation expense.
Term
The period of a loan, generally measured in
years. Car loans: generally range between two and five years.
Mortgage loans: generally 15 or 30 years.
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.
Title
A legal document that shows who owns an asset.
A title includes any liens or other encumbrances, which are
claims on the asset by lenders.
Trade-in value
A dealer assigns a trade-in value to an Car,
boat or other vehicle that a buyer wishes to exchange for a
replacement vehicle. Trade-in value, also called trade-in allowance,
is subtracted from the purchase price of the vehicle. Trade-in
value is often based on the published book value of the vehicle.
As a general rule, a vehicle with less wear and tear has greater
trade-in value.
Underwriting
Underwriting means different things to different
financial-services industries. For mortgage lenders, it is the
process of evaluating a loan prospect to see if they have the
financial capacity to repay the loan. For investment bankers,
it is the process of arranging a sale of stocks or bonds to
investors. For insurance companies, it is the process of calculating
a premium for a specific pool of insurees with certain risk
characteristics such as age or health.
Upfront costs
Upfront costs are fees and any other costs
that you pay at a loan closing. This includes mortgage loans,
as well as consumer and installment loans, such as home equity,
refinancing, personal or car loans. Upfront costs are also called
closing costs. Upfront costs include the amount needed for a
down payment, any prepaid interest, loan underwriting fees,
and fees that you pay for ancillary services. These include
fees for title search, appraisal and credit report.
Upside-down
A situation in which the fair value of an
car is less than the principal balance of your car loan. This
often happens because of the large depreciation in the car from
excess due to excess wear and tear during the early years of
a car loan term.
VAT Qualifying Vehicle
IIf 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.
Vehicle options
Vehicle options are choices that are sold
separately for an extra fee when you buy a vehicle. Options
increase the vehicle sale price.
BUY, SELL, TRADE and EXCHANGE, PRE-OWNED, SHORT TERM, USED and EARLY TERMINATED CAR LEASE or VAN LEASES over 3 month, 6 month, 9 month, 12 month periods for non status, new start up businesses, barristers, ex-pat and security or armed forces personnel. Swap a Lease is a trading style of Clare Sherry-Brennan t/a Fleet Solutions