Finance Lease Explained

A Finance Lease is a flexible and tax-efficient solution for VAT-registered business organisations that can be applied to a vehicle lease.

A Finance Lease suits businesses and organisations where standard contract hire is too restrictive. There could be different reasons why contract hire could be restrictive, but some popular reasons are unpredictable or very high mileage due to heavy usage or operating vehicles in harsh accident-prone environments.

For example, a finance lease could be a preferable funding method for customers who operate vans in more risky environments, such as construction or quarrying. As the vans risk damage occurring that would exceed Fair Wear & Tear criteria.

A finance lease is a tax-efficient and flexible option for VAT-registered businesses and organisations that can be applied to a vehicle lease in certain circumstances. A finance lease provides two solutions to leasing the vehicle over a fixed period, either:

  • Fully Amortised - paying the full cost of the vehicle plus interest charges
  • With Balloon Payment - paying lower monthly rentals during the lease period, plus a final balloon payment based on the anticipated resale value of the vehicle.

At the end of your contract, the vehicle is sold to a third party and you receive a "rebate of rentals" equivalent to most of the resale value. With a Fully Amortised lease, you may be able to extend the contract for a nominal 'peppercorn' rental, but the business or organisation leasing the vehicle will not be able to take ownership.

Benefits of a Finance Lease:

  • Better MoM (Month on Month) budgeting due to fixed monthly costs
  • Reduced overhead costs to your business, invest in your business not depreciating assets
  • Fixed interest rates
  • Leasing company recovers VAT on vehicle purchase, reducing costs
  • You get VAT recovery, usually 50% on the finance lease rental for cars and 100% on vans
  • Rentals are offset against taxable income for corporation tax
  • Fixed maintenance costs on cars and vans
  • Contract flexibility, no mileage or conditional restrictions