Business car lease vs personal car lease

If you’re leasing a car, you’ll get a choice between business and personal leasing. They might sound similar, but there are important differences – including the price. Here’s the full low-down on the differences.

How does business car leasing work?

Business leasing (otherwise known as Business Contract Hire, or BCH) is a lot like Personal Contract hire (PCH), only instead of leasing the car just for personal use, you lease it on behalf of your company. A VAT registered company can lease the car for between one and five years, and it can be used by employees for both personal and business purposes.

In order to qualify for a business car lease, you need to be one of the following:

• A limited company or private limited company
• A sole trader
• A VAT registered company
• A limited liability partnership
• A partnership

As with a personal lease, a down payment needs to be paid before the lease starts. The down payment is expressed as multiples of the monthly rental – eg a 6+23 deal means you have to pay six months lease costs up front, and then 23 monthly payments.

The annual mileage limit needed is quite often higher on a business lease than a personal one, because company cars tend to be subjected to lots of motorway miles. The maximum can be as high as 40,000 miles a year but, again, this can vary on different deals. If you cover more than the maximum mileage, the company will have to pay an excess mileage charge, and also any damage charges if repairs aren’t made before before returning the car. Sometimes companies do pass these charges onto the employees who drive the business leased cars.

Pros of business leasing

• Price: Business car leasing is, more often than not, cheaper than personal leasing. This is because you can reclaim the VAT.
• No worrying about depreciation: Cars are a depreciating asset. They can lose as much as 60% of their value in the first three years, however this risk is taken by the lease provider.
• Higher mileage limits: All lease deals will have a mileage limit, however business lease deals tend to offer higher allowances due to the amount of motorway work company cars are subjected to.

Cons of business leasing:

• No modifications: The car has to be given back in exactly the same condition as it was in when you collected it, so you can’t stick your logos on the side.
• Charges for damage: The car also has to be returned undamaged, or you could face hefty charges to rectify any problems. To make the most of the low cost, you’ll have to keep personal use to a minimum. You can only reclaim 100% of the VAT on a business lease if there’s no personal use.

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How does personal car leasing work?

Personal Contract Hire (PCH) is very similar to a business lease, but for predominantly personal use – you’ll still pay an initial payment and then a fixed monthly payment for two or three years, depending on the deal. A mileage cap is included in a personal lease, too, so the same charges apply if you exceed it. You also need to be mindful of damage, as you’ll be charged for anything which doesn’t fall under fair wear and tear.

With both BCH and PCH, the registered owner of the car is the leasing company – which you should remember to tell your insurance company too.

Pros of personal car leasing

• More control over your finances: You pay the lease directly to the lease provider, rather than going through your business. This makes it easier to keep track of spending.
• Freedom too do what you want with the car: With business leasing, you can only claim back 100% of the VAT if you don’t use the car for personal travel. This isn’t a consideration you need to make with personal car leasing.
• Still no need to worry about depreciation: As with business leasing, the depreciation is dealt with by the leasing company.

 Cons of personal car leasing

• More expensive than business leasing: You can’t claim the VAT back on personal leasing, so it can be more costly.
• Lower mileage limits: Personal lease deals tend to have lower mileage limits because motorway slogs to business conferences aren’t necessarily taken into account. You may therefore have to pay extra for a higher allowance.
• No modifications or damage: As with BCH, you have to return the car in the same condition as t was delivered in, so any damage may end up costing you dearly.

What is the difference between business leasing and personal leasing?

The premise of business car leasing and personal car leasing is fairly similar. Both will require you to make an initial deposit, followed by a series of monthly payments before handing the car back at the end.

The key difference is in the cost. With BCH, you can claim back the VAT on the lease, saving money each month. You can’t do that with a PCH deal.

There are also differences when you come to apply for the lease. With PCH, you’ll need to provide proof of ID, proof of address and, more often than not, proof of income. With BCH, the details you provide relate to the company which you are taking the lease out against. You’ll need the registration number of the business, details of the owner and any directors, as well as the address of the company and a few bank statements.

Why is a business lease cheaper than a personal lease?

Business lease deals are usually cheaper per month than a personal lease because you can claim 100% of VAT back on the monthly payments and all of the VAT on any maintenance agreements you take out, so long as the car is used solely for business use. You can only get a business lease if you lease your car as a VAT registered company. That can make it considerably cheaper than a PCH contract – the price of a PCH should always include VAT.

If you use your company car for personal use as well, you can expect to only be able to claim back 50% of the VAT on the monthly payments. If you want to claim back 100% of the VAT, you’ll need to carefully document the car’s mileage to prove that it’s only been used for business purposes.

When a car leased on a business contract is used for personal journeys, the mileage accrued must be deducted from the total mileage because it will be subject to the VAT you’d pay on a personal lease.

Which type of car lease is better?

If you qualify for a business car lease, it’s certainly something to consider. You will have to document your mileage, however the tax you can claim back will make up for that. It also means you don’t have to invest money into a depreciating asset, as you can just hand the car back come the end of the lease.

However, if you’re looking for a car for solely personal use, a personal car lease will be better suited. You won’t be eligible to claim any VAT back on the monthly payments anyway, and it saves the hassle of needing to document your mileage.

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Business car lease vs personal car lease FAQs

● Is it better to lease a car through business or personal?
It depends. A business lease will work out cheaper in most cases, because you can reclaim some or all the VAT. The full amount of VAT can be reclaimed if the car is used for business purposes only. If it is used for personal mileage too you can claim back 50%. Either way that’s a worthwhile saving over a personal lease.
However, these business car lease deals are only available to business drivers – they have to be arranged through a company or business. As a private individual, you’ll be looking at a personal lease deal instead.
So, if you are a business owner or you are sourcing a company car, a business lease is usually better than a personal lease. If you are looking to arrange your own car outside of work, then a personal lease is what you need.
● Can I claim a personal car lease as a business expense?
Potentially, yes. To start with, be sure that the terms of your personal car lease and your insurance cover both allow for use of the car on business. Then you may be able to claim some expenses and some tax deductions for the use of your car on business.
● Can you change a personal car lease to business?
No, usually that’s not possible. You can’t swap a personal car lease to a business agreement in the middle of the contract. The two types of lease are different contracts with varying terms and tax implications. There is a type of transfer called ‘novation’, which moves a leasing agreement from one business to another, but this doesn’t apply for moving a personal contract to a business lease.
● Can anyone drive a business lease car?
Not just anyone. They need to be covered by insurance. However, multiple drivers can use the same business lease car so long as they are insured. The person whose name is on the leasing agreement is responsible for giving permission to other drivers.
● Do you have to pay VAT on a business car lease?
The VAT can be reclaimed. If the car is used solely for business purposes, 100% of the VAT can be claimed back. If there are some personal miles as well as work use, then 50% of the VAT can be reclaimed.