Van Finance Funding your vehicle - A broad over view In plain
English It is important to note there is no single "Best
way" or "Cheapest way" to fund your Commercial vehicle.
Whichever method you opt for, over the life time of the
vehicle with you (say 2,3 or 4 yrs) the Tax allowances
received or write allowances claimed, the benefit will
come out roughly the same on all methods.
If one stops and thinks about it, the Government would not set the tax breaks
up in a manner that favours one method over another, whereby opting for one method,
Company's would not have to pay thousands over in Tax, they realise they would
lose a fortune in tax revenue because everyone would go this way.
So it comes down to suitability, which method suits your business the best. There
is no right or wrong way, which suits you may not suit your business next door
neighbour.
In an attempt to keep things simple we will cover the main types of funding,
that is Contact Hire (With or without maintenance) Hire purchase and Finance
Lease. (There are subtle hi breeds of each method, this is designed to be a general
over view of your options.
Contract Hire: This method suits
the high mileage user who may not have the time to
arrange his/her own servicing etc. Generally speaking
it suits the larger company's with many people on
the road in company owned vehicles and by opting
for a maintained Contract removes the requirement
for a Fleet manager to over see the vehicles.
It does come with one or two BEAR traps, however.
All Finance arrangements HAVE to be able to be settled
early if required. Contract Hire is the most rigid
and financially punitive to get out of early because
of the way the settlement figure is calculated. Broadly
speaking, if one is say 18 months into a 36 month
Contract and is paying £300 per month for the Contract, for reasons of change or
growth etc one needs to get out of the Contract, the settlement figure is calculated
thus: there is 18 months left @ £300 per month, giving a total of £5400.00,
the settlement figure is normally circa 85% - 87% of that figure, in this case
therefore £4590 to £4698,once paid of course the Contract Hire Company
would simply take the vehicle away and the Contract is discharged. (In addition,
charges for reconditioning work they may feel is required would be applied).
Hire Purchase: Most people know and understand Hire Purchase.
With Commercial vehicles it is Normal (although not essential) that the VAT element
of the costs are paid in advance plus any deposit one may wish to add to that
figure. The balance is then funded over the period of the loan, always remembering
of course the vehicle is not owned by the customer until the final payment has
been made. It is interesting to note that because most people would be looking
to change the vehicle as it draws near its final payment, they never actually
own it at all!
Finance Lease: A VAT efficient and low initial outlay method
of acquiring your vehicle. A relatively small initial outlay is paid and the
vat is charged on the monthly costs, then reclaimed 100% at the end of each VAT
quarter. A residual Value (sometimes called a balloon) is set at the end of the
agreement which has the effect of reducing the monthly payments. It is imperative
to set the residual value at a Conservative level to ensure equity is gained
at the end of the agreement. i.e. if the residual is set at say £3000.00
(for example) and the vehicle realises £4,000 on disposal, the £1,000
equity is yours to use as a deposit for the replacement (if you wish) or to keep.
However if the residual had been set at say £5,000 in order to achieve
lower monthly payments and the vehicle realises £4,000 you would have a £1,000
negative equity which would have to be dealt with BEFORE finding the deposit
for the replacement vehicle. Sometimes advertisements are taken out whereby you
can Lease a certain type of vehicle for only £XXXX pounds per month, which
seems an incredible deal, but often the devil is in the detail, the sting in
the tail!! It is always best to set residual value at as lower level as possible
in order to protect your future rather than mortgage it!
This is meant to be only a very simple, broad over view, for further detail please
feel free to contact me on 0845 8800151 (local rate). We would always recommend
you talk through your proposed acquisition with your Accountant, he knows your
company better than we do and should be able to advise.
