How to save money when acquiring commercial vehicles

How to finance a commercial vehicle 

Over the last 30 years it is becoming increasing common to use commercial vehicle finance when purchasing their company cars, vans or larger commercial vehicles.

As the market has developed so many differing forms of finance have emerged. But what is the best option? As a business owner it is important to understand the various options available to you to what meets your needs. While there are some hybrid financial options available there are basically three types of commercial vehicle finance: Hire Purchase, Finances Lease and Contract Purchase.

We asked Will Richardson from A4G Growth to take us through each option and the key benefits of each to help you make a decision which finance option would be right for you.

Hire purchase

Hire Purchase offers a straightforward way to spread the cost of a new vehicle. With a hire purchase agreement, you pay a fixed rate of interest for the whole term and benefit from fixed monthly payments which helps to make budgeting simple.

You choose the amount of deposit you wish to pay, typically a minimum of 5% up to 50% of the vehicle’s purchase price. The remainder of the balance, together with the interest, is repaid over an agreed period. The terms vary from 12 to 50 months, but 24- and 36-month agreements tend to be the most common.

Benefits of hire purchase include:

• Low deposit – not a drain on working capital
• Fixed monthly payment – makes budgeting simple
• Flexibility – doesn’t compromise your other lines of credit
• Assets – you gain ownership of the vehicle
• Your business owns the vehicle from day one – if buying a commercial vehicle, you save tax on the full value of the vehicle in the year you buy it (this doesn’t apply in the same way for company cars)
• VAT paid at outset and can be claimed back on your first VAT return after purchase

Commercial vehicle Finance Lease

This is specific to commercial vehicles and excludes cars.

In general, leasing is usually good for vehicles that you are likely to change or upgrade regularly or where you do not have the cashflow available for a significant upfront deposit.

With Finance Leases the vehicle is hired to you by the finance company and remains in the ownership of the finance company throughout the term of the agreement. Monthly payments are fixed for the duration of the contract. Because you do not take ownership of the vehicle at the start of the contract it has a very different treatment for tax purposes.

VAT is payable on the monthly rentals rather than in full at the outset of the contract. Contract lengths tend to be either 12, 24 or 36 months. At the end of the agreement the vehicle is taken back by the finance company.

Benefits of commercial vehicle finance lease include:

• Fixed payments for the whole agreement
• Low deposit – for just a small outlay, you can use the asset immediately
• Payments are tax deductible as they are paid
• Flexible payment structure can be tailored to match your cash flow
• Fixed or variable interest options – you decide which suits you best
• Tax advantages – the monthly lease payments can normally be offset against taxable profit, spreading the tax benefit over the time you use the vehicle
• No penalty charges for additional mileage or damage at the end of the agreement
• Although the customer does not own the vehicle, they will receive up to 98% of the sale proceeds. Where a ’balloon rental’ has been introduced, these proceeds are utilised to help clear the rental

*There are restrictions on what can be claimed for company cars if their CO2 emissions are above 110g per kilometre.

*Company cars that have any element of private use also have a restriction on the amount of VAT that can be reclaimed on the lease costs, with only 50% being allowable for the VAT returns.

Contract hire

Contract Hire, sometimes known as an Operating Lease, is much like commercial vehicle leasing.  Again, you do not take ownership of the vehicle but rent the asset from the finance company. As above it is generally good for vehicles that you are likely to change or upgrade regularly or where you do not have the cashflow available for a significant upfront deposit.

It also has the advantage that you don’t own an asset that is losing value with every mile that it drives.

Contract hire has more restrictions in the terms than a commercial vehicle finance lease but can be used for a wider range of assets, including company cars. The vehicle is hired for an agreed period of time, usually between 12 and 60 months and a rental is paid based on a pre-agreed mileage limit.

Key points for Contract Hire Company Cars

In respect of company cars, it has a slight benefit compared to owning the vehicle via an HP agreement. If you own the car as an asset of the business, and your business isn’t a taxi firm or in the motor trade in some form, then you cannot claim the VAT on the purchase of that car. If you lease the car however you can generally claim back 50% of the VAT on the lease payments.

There are restrictions on what can be claimed for company cars if their CO2 emissions are above 110g per kilometre. These higher C02 cars face a 15% “disallowing” of the lease cost for tax purposes. So, if the lease was £450 (excluding the 50% VAT that was reclaimable) then £67.50 of this cost doesn’t attract tax relief.

For a limited company this means missing out on £12.83 each month of tax savings. Minor but important to note.

Benefits on contract hire include:

• Road Tax for the period of the contract is included in the contract and will be sent to you automatically
• Contract hire can include all maintenance including servicing and consumables
• Fixed Monthly Rentals throughout the contract, allowing easy budgeting
• When calculating the rentals on an operating lease, the residual value of the asset is taken into account. This can result in monthly rentals significantly lower than you would be offered on a lease or a hire purchase agreement

We have focussed mainly on the financing and buying options here, but you should also consider if there are other taxes, including benefit in kind taxes, that might sway your decisions about buying a vehicle.

There is more information about these tax considerations in our article: Is buying a company car worth it?

If you’d like support in sourcing the right finance for your commercial vehicle, A4G Growth have access to a range of finance funders, ensure the right finance is put in place for your business and can take of the whole process for you.

Call 01474 853 856 or email enquiries@a4ggrowth.co.uk for a free no-obligation chat about your finance needs.

How to reduce your insurance premiums 

New research has revealed that almost half of commercial vehicle operators in the UK have suffered rising fleet insurance costs over the past 12 months. With this in mind, we’ve put together 8 ways you can reduce your insurance premiums:

1. Install vehicle trackers to track the location of the vehicle and how well employees are driving
2. Install alarms to discourage thieves
3. Install dashboard cameras
4. Carry out regular risk assessments
5. Store vehicles in a secure place overnight
6. Choose your vehicle wisely, for example choose a newer vehicle, with up-to-date security system, lower CO2 emissions etc. Whilst it may be an expensive option, it could save you money on premiums
7. Employ drivers with a clean license
8. Combine policies

Whichever way you look at it, commercial vehicle insurance is an inevitable and costly expensive. But it is absolutely necessary you get the right insurance for your needs.

It’s best to have a broker in your corner to find you the best premium for your vehicles. If you’d like some further advice for bringing your premium down and finding the right option for your business, contact Martyn Brooks at Broadsure Direct on 0800 2922 241.

Staying on the right side of the law

Once your business starts to operate goods vehicles, either small vans or larger vehicles requiring an operator’s licence, you need to bring in systems to manage them, your drivers and protect the business.

Gary Wood from Plumwood says “Your vehicle may be taxed, insured and ready to go but is your driver legal? Is their licence valid? And do they have the correct categories on it to drive that vehicle or tow that trailer? Anyone watching one of the many reality police programmes will see how many drivers they stop with either no licence or a provisional one.

And what about the vehicle they drive – is it road worthy? Are all the lights working? Are the tyres legal? How do you make sure?”

This is not only important from a compliance and law point of view, but we’ve all seen those vans driving like a ‘bat out of hell’ with a broken side light with their company name emblazoned all over it. Doesn’t look good for your company does it?

Vehicle compliance is a confusing and time-consuming task to keep on top of, but incredibly important. Contact Gary at Plumwood at garyw@plumwood.co.uk for an initial discussion of how they can help you.

Benefit from the TALE grant

The Transport and Logistics Efficiency (TALE) grant is a grant of between £1k and £20k to improve your business data capability. It can be used for capital spend, software and consultancy fees. Typical areas it is used for are acquiring tablets, handheld devices, and software projects such as cyber security, people management, asset management, stock control, vehicle routing and warehouse management systems.

It is only open to SME’s in the Essex, Kent and East Sussex area who have a logistics function, e.g. freight transport, manufacturing, distribution and anyone moving goods from A to B.

It is 40% match funded, meaning you will get a 40% contribution towards the spend of your project, which you do not have to repay.

The TALE grant is only available until Spring 2021. Before time runs out, get in contact with Peter Searle at peter.searle@bac4cs.co.ukfor an initial discussion, or come along to our webinar where he’ll he be sharing more information about the grant and who is eligible.