Deciding on the best funding method for your company's car fleet can be a difficult decision, especially as the average company vehicle costs in the region of £22,000, a significant financial undertaking for any small business .

In order to look at the best funding option for your company, businesses need to consider their financial situation. One of the most important issues for any business is, of course, cash flow. Does, for example, your company have spare capital to tie up in an asset which, in the current market, will depreciate by an average 65% in the first three years or would you be better off investing that money in your core business?

There are two main routes for acquiring company cars. Your business can either own the vehicle or take out a contract to effectively pay for the use of the car.

The main funding methods are:

Contract Hire

Contract Hire is a tax efficient funding method where you hire rather than own the vehicle, paying fixed monthly charges for the duration of the contract.

It delivers 'off balance sheet' accounting and reclaimable VAT (50% on the finance element and 100% on the service element), and can help increase cash flow. A proportion of the lease rental is eligible for tax relief dependant on the retail price of the vehicle.

Under a Contract Hire agreement, the leasing company retains ownership of the vehicle at all times and therefore continues to absorb all subsequent risks such as unforeseen running costs and uncertain resale values.

Outright Purchase

Buying cars outright is only a relevant option for cash rich companies. It can be a more cost-effective option for cars costing £45,000 and over as only a proportion of the depreciation can be claimed under contract hire.

One of the main advantages of this type of funding is that companies get to keep any potential resale profits at the end of a vehicle's life. However, they also take the risk of any losses and it is worth noting that companies can't reclaim VAT on the purchase price which would apply if the vehicle was purchased by a leasing company.

Lease Purchase

Lease Purchase spreads the payments over several years, enabling you to own the vehicle at the end of the contract. It is treated ‘on balance sheet' allowing the company to benefit from writing down allowances.

The monthly rental is determined by the initial cost of the vehicle, the period of the contract, the proposed annual mileage and the anticipated future resale value. A payment equivalent to the estimated future value is payable at the end of the contract, when the vehicle becomes the property of the lessee.

Contract Purchase

This option helps companies purchase a vehicle over a set period of time and at fixed monthly costs, without taking the depreciation risks. The vehicle is treated ‘on balance sheet' enabling the company to benefit from writing down allowances.

Businesses can then buy the vehicle at the end of the contract, trade it in for a new one or simply return the vehicle, with no further payments due. As there is no VAT on the monthly finance payments, Contract Purchase often suits non- VAT registered companies.

Finance Lease

This is a tax efficient option where you can choose to fund the entire cost of the vehicle, plus interest, over a set period or pay lower monthly rentals and then a final payment based on the anticipated resale value.

The vehicle is shown on the balance sheet and the VAT is reclaimable. The monthly rental is determined by the cost of the vehicle, contract period and proposed annual mileage.

Businesses benefit through fixed cost motoring with optional maintenance packages but also take on the administration and operating risks for the vehicle. There are also some personal funding options which may appeal to drivers wishing to take a cash allowance, predominantly Personal Contract Hire (PCH) and Purchase Contract Purchase (PCP).

Mike Bell is director at My Lease. For more information click here or call 01372 466077