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What are the different types of business leasing agreements?

1 December 2023
Business, Basics Of Business Leasing Guide

The most popular form of business leasing is Business Contract Hire (BCH) agreements. However, it’s worth noting that there are several other types of business leasing contractual agreements, and the right one for your business will depend on your individual business needs, the type of vehicle you require to lease, and if you simply want to hand it back at the end of the agreement or possibly purchase the vehicle.

What is Business Contract Hire (BCH)?

Business Contract Hire (BCH) is suitable for sole traders, partnerships, PLCs and limited companies. It has several key benefits, making it a popular choice. VAT registered companies can claim back 50% of the VAT on the cost of leasing a car, as HMRC assumes some private usage (and 100% VAT for vans). The Road Fund Licence is included within the cost of the monthly payments and once the term of the agreement ends the vehicle is simply returned to the leasing provider.

BCH is particularly suitable for businesses who don’t want to worry about the risk of depreciation, as the vehicle is handed back at the end of the contract as the company does not own the vehicle.

What are the advantages of Business Contract Hire (BCH)?

  • The finance provider remains the owner of the vehicle, removing the risk of depreciation and disposal costs
  • VAT registered businesses can claim back 50% of the VAT
  • Fixed monthly rentals for the term of the lease
  • Low initial payment
  • Flexible options to meet your budget and driving requirements
  • Maintenance packages with monthly payments spread the cost of servicing and repairs
  • Road tax is included in the monthly costs
  • Manufacturers’ warranties apply

What are the considerations of Business Contract Hire (BCH)?

  • The vehicle must be maintained in accordance with the manufacturers’ requirements
  • At the end of the term, the vehicle must be returned in line with the lease company’s Fair Wear and Tear policy
  • If you exceed the agreed mileage, a charge will apply
  • There is no option to purchase the vehicle, it must be returned
  • It is your responsibility to insure the car with fully comprehensive cover
  • It can be expensive to terminate your contract early

What is Business Contract Purchase (BCP)?

Business Contract Purchase (BCP) is suitable for VAT registered businesses. An initial deposit is required along with the monthly payments and, at the end of the agreement, the organisation has the option to purchase the vehicle through a balloon payment, the cost of which is agreed at the start of the contract. In some instances, it may also be possible to extend the term of the agreement.

What are the advantages of Business Contract Purchase (BCP)?

  • Great for businesses wanting the option to purchase the vehicle
  • The value of the vehicle can be put against taxable profits
  • Fixed monthly payments for the term of the agreement
  • Low initial payment
  • A flexible option to meet your budget and driving requirements
  • There is no VAT to pay on monthly finance payments, but VAT is applicable on any maintenance plans taken out
  • The balloon payment is agreed at the start of the lease, meaning there is no risk of negative equity (providing mileage is not exceeded and the vehicle meets fair wear and tear guidelines)
  • The business has the option to either keep the vehicle or hand it back at the end of the contract
  • Road tax is included for the first year of the agreement
  • At the end of the lease it may be possible to finance the balloon payment in monthly instalments, subject to credit acceptance
  • At the end of the lease the business can purchase the vehicle at the agreed price, sell or return the vehicle

What are the considerations of Business Contract Purchase (BCP)?

  • The vehicle must be maintained in accordance with the manufacturer’s requirements
  • At the end of the term, the vehicle must be returned in line with the BVRLA Fair Wear and Tear policy
  • If you exceed your agreed mileage, a charge will apply
  • It is your responsibility to insure the vehicle with fully comprehensive cover
  • It can be expensive to terminate your contract early

What is Business Lease Purchase?

Business Lease Purchase is purely a finance package for those organisations who eventually want to buy the vehicle. This is a less popular option because it is less flexible than other business finance packages. The organisation must take ownership of the vehicle by making a balloon payment at the end of the term.

What are the benefits of Business Lease Purchase?

  • The vehicle will belong to your company once the lease purchase contract has started
  • The vehicle is registered in the name of your company
  • A slower depreciation of the vehicle
  • The vehicle will be a company asset and appear on the balance sheet meaning the value of the vehicle can be offset against taxable profits
  • Low deposit and fixed monthly payments

What are the considerations of Business Lease Purchase?

  • Business Lease Purchase is a pure finance package
  • The vehicle must be purchased at the end of the contract term through a balloon payment which may be higher than the value of the vehicle
  • The vehicle must be insured with fully comprehensive cover
  • There is no option to return the vehicle at the end of the agreement

What is Business Finance Lease?

Finance lease is a popular option for businesses as it offers significant tax advantages. It is suitable for limited companies, partnerships, the self-employed and sole traders. The vehicle can be leased in one of two ways. Option one is to pay the cost of the entire vehicle over an agreed period. Option two is to pay lower monthly payments, with a balloon payment at the end of the term. Up to 50% of the VAT can be reclaimed by VAT registered companies for cars (up to 100% for vans), and the vehicles will show as an asset on your balance sheet.

What are the advantages of Finance Lease?

  • Fixed monthly payments
  • Low upfront costs
  • VAT registered businesses can claim up to 50% of the VAT on cars, and up to 100% on commercial vehicles (certain rules apply)
  • Non-VAT registered businesses can spread the cost of the VAT as part of their monthly payments
  • No excess mileage charges
  • Payments can be offset against taxable profits with VAT only payable on the rentals and not the purchase price (certain rules apply)
  • Although you will not own the vehicle at the end of the agreement, if the vehicle is sold to a third party you will receive 98% of sale proceeds, with 2% paid to the finance company


What are the considerations of Finance Lease?

At the end of the lease, you will have done ONE of the following:

  • Paid the entire cost of the vehicle through monthly payments, so you now own the vehicle; OR
  • Opted for the lower monthly payments, so you must pay the balloon payment and operate the vehicle under a peppercorn agreement, also known as a secondary rental agreement;

OR

  • Sold the vehicle to a third party. You will benefit from this if the vehicle has equity in it and is sold at a profit. However, if the sale price is less than the agreed residual value, you will be responsible for paying the difference back to the leasing operator

Information is for guidance only and is subject to change. Your company accountant should review your business leasing requirements before committing to a contractual leasing agreement. You will not own the vehicle. Early termination charges and end of contract charges may apply.

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