Reproduced with kind permission of the BVRLA (British Vehicle Rental and Leasing Association)
- Accessories – contract hire companies sometimes impose restrictions on the accessories which may be fitted by drivers to a vehicle. Any contract will usually insist that such accessories remain in place or that any damage is made good when the car is returned.
- Accidents – under most financing agreements the user is obliged to provide comprehensive insurance cover for the leased vehicle. This insurance should cover any early settlement costs that would be payable if a lease vehicle is written-off in an accident. Insurance matters and accident procedures should be fully detailed in the contract terms.
- Accident claims management – many contract hire and fleet management companies now offer an accident claims management service. When a driver is involved in an accident, the contract hire company will manage the total process from completion of the claim forms through to supervising the repair. This can often speed up the repair and reduce time spent off the road.
- Administration – the running of a car fleet involves clerical and organisational effort in many areas. Buying cars, selling used cars, dealing with garages and the DVLA are among the most obvious. A leasing or fleet management company can relieve the user customer of much of this workload but there will always remain some administration costs to the user.
- Allocation policy – the terms under which a company makes cars available to its employees. Where a company buys its cars, the allocation policy is often linked to the purchase price of the vehicles. Where a company changes to some form of leasing or contract hire it is more normal to base the car choice on monthly rentals or the total cost of ownership, including fuel, insurance, etc.
- Amortisation – an accounting term which refers to the ‘writing-off’ of an intangible asset over a period of time in a company’s books. A fully amortised asset or lease is one which has been fully depreciated and carries no value in the company’s balance sheet at the end of the period.
- Balance Sheet – a financial statement summarising a company’s financial assets and liabilities at a point in time.
- Balloon payments or balloon rentals – in some finance agreements a ‘balloon rental’ is due at the end of the lease period. It is often determined by the leasing company to be their view of the anticipated resale value of the vehicle at the end of the lease period. This means that monthly rentals are lower than in an agreement which repays the whole capital cost, since the user is paying for a reduced amount of depreciation in the monthly rental.
Balloon payments which are set high will produce a lower rental, but at the end of the lease the hirer may find they have a vehicle to sell which is worth less than the balloon rental and they will be responsible for making up any shortfall.
- Breakdowns – in the event of a breakdown many contract hire agreements are able to provide a replacement car for a specified period while the hired car is off the road. Potential hirers should find out what level of service is included.
For example, is it only available after a certain period or for a limited duration? Agreements may include cover with breakdown assistance providers including the AA or RAC.
- Budgeting – an important advantage of contract hire is that it assists the user in fixing forward budgets. Contract hire rentals are fixed for the period of hire and future costs are thus easy to determine.
- Capital Allowances – these allow a company to obtain a Corporation Tax deduction for the cost of certain qualifying business assets (ie vehicles).
- Company car (Benefit-in-kind) taxation – income tax assessed on employees who have the private use of a company-provided car. Tax is also payable where the employee receives free fuel for private purposes. Benefit-in-kind tax does not depend on the method of vehicle funding.
- Cash flow – the movement of cash into and out of a business.
- Conditional sale – a conditional sale is a purchase agreement between the finance company and the customer, where the customer agrees to buy the vehicle. The customer achieves ownership when certain conditions have been met.
These are normally:
- All the regular payments have been met
- The goods are insured and in good condition
- Any balloon payment under the agreement has been paid by the customer
- Contract hire – one of the most common types of lease, also known as and usually accounted for as an operating lease. The contract hire company (the owner of the car) accepts responsibility at a fixed fee for depreciation, funding costs and administration. Contract hire is usually a fixed price service. The lease rental is split between the ‘finance’ element (payment for the use of the car) and the optional additional services (servicing, repairs, breakdown cover, etc) to enable the lessee to recover all the VAT on the latter and to block 50% of the VAT on the former where there is any private use, subject to the normal rules. It is important that the leasing company issues a valid VAT invoice, separating out the finance and services elements of the lease, to facilitate this treatment.
- Contract purchase – an agreement which seeks to provide the administrative advantages of contract hire, but uses a conditional sale or credit sale agreement, where the customer can own the vehicle once all the payments have been made.
- Credit Sale – a credit sale is a contract between the finance company and the customer where the customer agrees to buy a motor vehicle. It is usually a fixed cost, fixed term loan. It differs from Hire Purchase and Conditional Sale in that the buyer of the goods immediately becomes owner.
- Damage – most contract hire agreements allow for the car to be returned at the end of the agreement in a reasonable condition for its age and mileage. Both parties should agree on what this is before signing an agreement. The BVRLA publishes guides to fair wear and tear for cars, and for light and heavy commercial vehicles, which are used by many leasing companies.
No company will accept a car with damaged bodywork or broken glass, but some lessors may insist on charging the hirer for minor scratches and stone chips.
- Depreciation – in car leasing terms, depreciation is the loss of value from the actual purchase price to the sale value when the car is sold. This may not be the same as the depreciation for tax or accounting purposes. Different vehicles have different depreciation patterns, which is why two cars may have the same cost price but a different contract hire rental. Depreciation is one of the major costs in running vehicles and should be taken into account when comparing vehicle running costs and acquisition policies.
- Disposal – at the end of the contract hire agreement, the car is returned to the owner and it becomes their responsibility to sell the car. In the case of a finance lease, any profit or loss on disposal may be returned to the lessee in the form of a rebate of rentals or extra balloon payment.
- Excess mileage – with any contract hire agreement, the probable annual mileage the car will travel is crucial, since it will affect the resale price of the car at the end of the contract and the servicing costs built into the rental. The contract will be based, therefore, on a pre-agreed total mileage. If that mileage is exceeded, a penalty may be charged for excess miles to compensate the lessor for the increased cost of servicing and depreciation.
- Extras – almost any make and model of vehicle can be provided on lease or on contract hire. This includes any chosen specification, but users should be aware that factory extras, like accessories, often depreciate very quickly. The effect of this is to add considerably to the cost of hiring and it is wise to look at the cost of the basic car before comparing the costs of adding any extras.
- Finance lease – a finance lease provides funding for the chosen vehicle. The lease may be a lease with a balloon rental or a fully amortised lease with no balloon. The lessee may be entitled or required to sell the car at the end of the lease on behalf of the lessor. A substantial proportion of the proceeds of such a sale can be refunded to the lessee as a refund of rentals or fee.
- Fleet management – where a company wishes to delegate some or all of the tasks associated with buying, selling, operating or administering a vehicle fleet, these services can be supplied by fleet management companies and are usually invoiced on a monthly basis.
- Flexible lease – a fully amortised lease which is often written for an initial period of up to 48 months. A schedule to such a lease will list the termination cost of cancelling the lease at any time after an initial minimum period.
- Fuel card – used in conjunction with a fuel policy, fuel cards can reduce fuel costs, improve purchasing control, streamline administration and introduce management information. Fuel cards deliver a regular, consolidated VAT invoice that ring fences fuel expenditure. Fuel cards are not taxed – see Free fuel, below.
- Fuel management – fuel is typically the second-highest fleet cost after vehicle depreciation. Adopting an effective policy, targeting cheaper fuel sites, reducing fuel consumption and mileages driven are all features of sensible fuel management.
- Free fuel (company provided fuel for private use) – car fuel benefit is a tax charge on an employee where fuel is provided by the employer for private use. No income tax charge arises on the employee if they pay for all their fuel and receive a business mileage allowance which is no more than the cost of the fuel used for business travel. Similarly, no income tax charge arises on the employee if the employee uses a fuel card for all fuel expenditure and reimburses the private mileage element to their employer. Keeping accurate records of business mileage is essential to avoid a free fuel liability.
- Guaranteed buy-back – some vehicle suppliers may undertake to supply a new vehicle and agree to repurchase the vehicle at a guaranteed price at a predetermined date and mileage in the future.
- Hire purchase – a fixed-cost, fixed-period financing to support the purchase of a vehicle. In law the title to the vehicle may generally not pass until the final payment is made, which is usually in the form of a nominal ‘option to purchase’ fee.
Monthly repayments cover capital repayment plus interest and do not carry VAT. Where qualifying cars are financed through hire purchase, a fleet user would need to request a tax invoice to recover up front the input VAT. However, VAT is not recoverable on a car unless:
- it can be proved that no private use of the car will take place;
- the car is to be sold unused; or
- the car is purchased for use by a daily rental company, leasing or contract hire company, VAT registered driving school or VAT-registered taxi firm.
- Hirer – the customer/lessee of the vehicle under a hire purchase or contract hire agreement.
- Hiring – hiring means obtaining the right to use an asset, without ownership, in return for the payment of a rental. Hiring can be short- or long-term and all forms of leasing are effectively hiring contracts.
- IAS 17 – IAS 17 is the lease accounting standard for those organisations applying International Accounting Standards.
- Implicit rate – the interest rate implicit in the financing cost of a lease or hire agreement.
- Insurance – most leasing and hiring agreements require the lessee (user) to arrange comprehensive insurance cover with the lessor’s interest as the owner noted on the policy.
- Lease contracts – all leasing agreements must comply with statutory requirements and all members of the BVRLA must use contracts which comply with the association’s code of conduct. With small fleets or single users there is normally one contract or agreement per vehicle. Where a fleet of vehicles is involved it is normal for a master agreement to be signed and a schedule to be provided for each vehicle, which is added to the master agreement from time to time.
- Lease purchase – the term lease purchase has developed to describe a type of hire purchase contract which includes a final balloon payment at the end of the agreement in order to reduce the monthly repayment during the life of the agreement. The monthly payments do not carry VAT. However, for qualifying cars, users would need to request a tax invoice to recover, up front, the input VAT.
- Lease – the use of an asset without the ownership of it. The concept of separating use from ownership is important in law and in taxation treatment. Leasing without purchase is usually treated as a service for VAT purposes and the rentals are subject to VAT. The rental is split between the finance element (which takes into account the cost of the car including vehicle registration fees, road fund licence, its period of use and anticipated mileage, funding costs, its rate of depreciation and the forecasted residual value) and the optional additional services, to enable the lessee to recover all the VAT on the latter and to block 50% of the VAT on the former for cars where there is any private use.
- Lessee – the user of the vehicle, the hirer.
- Lessor – the owner of the vehicle, the leasing company.
- Maintenance – an overall term to cover all the technical and mechanical attention needed by a motor vehicle, including routine services, repair and replacement of worn components. With a finance lease these costs are often borne by the lessee; with a contract hire agreement they may be borne by the lessor and effectively included in the rental. Check for any exclusions in comparing one contractor with another. A maintenance agreement will seldom cover broken glass or punctures.
- Margin-scheme cars – second-hand margin scheme cars are cars where input tax has been blocked from recovery earlier in the supply chain and no VAT is chargeable when purchased. This is because VAT has already been paid and blocked when the car was new. VAT is only payable on the sale of a margin scheme car if the selling price exceeds the original purchase price and then only on the margin.
- Operating lease – any lease under which most of the risks and rewards of ownership are borne by the lessor. Under current accounting rules, the fixed assets in an operating lease will remain on the balance sheet of the lessor and not the lessee.
- Personal contract hire – personal contract hire is essentially the same as regular contract hire, but applies to individuals. However, as an individual, the customer will not be able to take advantage of any tax allowances or recover any VAT.
- Personal contract purchase – an agreement between a finance or leasing company and an individual private purchaser of a vehicle. The agreement is normally based upon a conditional sale or credit sale agreement and, dependent on the amount of credit, may be regulated by the Consumer Credit Act. In other respects, the arrangements are similar to corporate contract purchase. It should be noted that personal contract purchase is not leasing and should never be described as personal leasing or personal contract hire.
- Present value (also net present value) – the present value of a sum of money receivable at a future date is that amount which if invested today at an interest rate (the discount rate) would grow to yield the same amount at that future date, eg using a discount rate of 10%, £100 would yield £110 in a year’s time, and thus the present value of £110 using a discount rate of 10%, is £100.
- Qualifying car – a qualifying car is a car which has not been subject to the full input tax block. This means that your business has recovered the input tax on the purchase in full. Such cars will be sold on a normal tax invoice with VAT charged on the full selling price.
- Recovery services – membership of roadside assistance organisations is often included in full maintenance contract hire. Check what level of service is included.
- Registration documents – the V5 registration document does not indicate or confer ownership of a vehicle, it records the registered keeper. With finance leases, where the lessee is responsible for paying the annual vehicle excise duty, the car will normally be registered in the name of the lessee. With contract hire agreements the vehicle will nearly always be registered in the name of the contract hire company.
- Relief cars (or replacement cars) – some contract hire agreements which include maintenance can provide a replacement car if the hired car is off the road for repairs. This service may be available after 48 hours, 24 hours or one hour. Check the contract terms. For VAT purposes, if a car is hired simply to replace an off-the-road car, the 50% blocking rule applies.
- Residual value – the estimated value of a leased vehicle at the end of a contract period, usually calculated based upon its age and mileage.
- Rental – the periodic payment made by the lessee to the lessor under the terms of a leasing agreement. Rentals may be paid on any basis and may carry VAT.
- Rental holiday – any period during which rental is not paid as a result of an initial or deposit payment. This holiday is normally at the end of the agreement.
- Replacement cycle – the normal period for which cars are used. The length of this cycle will be affected not only by annual mileage, but by differing depreciation characteristics of different models. It is worth comparing hiring rentals over differing periods and at differing annual mileages to determine the optimum replacement cycle.
- Road traffic penalties – with some leases and most contract hire agreements the registered keeper on the vehicle registration document is the leasing company. Unpaid road traffic tickets will usually go to the lessor and they will be recharged to the lessee with an additional administration fee. For some offences, a lessor may be able to transfer liability to the customer, where the customer would be approached by the enforcement authority for payment.
- Sale & lease back – a leasing company purchases the existing cars from the user company at an agreed value and leases or contract hires them back to the original owner or to a person connected with the original owner.
- Spread rentals – the practice of collecting a number of rentals in advance on a contract and then dividing the balance payable by the contract length minus one month. This has the effect of reducing monthly payments.
- SSAP 21 – Statements of Standard Accounting Practice are the rules set out by the UK Accounting Standards Board concerning accounting conventions and the way accounts are presented for those applying UK GAAP. SSAP 21 concerns the treatment of leased assets and states that vehicles subject to a finance lease are required to be capitalised in the lessee’s balance sheet, with the lease rentals being shown as a liability. Operating leases are off balance sheet as far as the lessee is concerned and the rentals only appear as operating costs in the profit and loss account. IAS 17 is the lease accounting standard for those applying International Accounting Standards.
- Terminal pause – many lessors collect three or six rentals in the first month of a contract. Where this occurs there will usually be a terminal pause with no payments being made in the last two to five months of the contract. Users should ensure in comparing lease quotations that they are comparing like with like in respect of repayment patterns and numbers of rentals.
- Title – in most forms of leasing agreement, legal title to the vehicle, or legal ownership, is retained by the lessor and cannot be obtained by the lessee. If title is envisaged to pass under a lease purchase contract the contract is likely to be treated as a supply of goods rather than services for VAT purposes.
- Tyres – in most contract hire agreements, where servicing and maintenance is included, the contract hire company will pay for replacement tyres. This service is sometimes restricted to a maximum number of new tyres over the life of the contract and hirers should check this point before signing an agreement. Punctures or other tyre damage are generally not covered.
- Value Added Tax (VAT) – VAT is charged on taxable supplies of goods and services. Most leasing agreement rentals are subject to VAT at the standard rate. Where there is any private use of the car, only 50% of the VAT may be reclaimed by a VAT-registered lessee on the element of the rental relating to the supply of the car and the vehicle excise duty. All the VAT may be claimed, subject to the partial exemption rules, on most additional services (eg maintenance charges) under a leasing agreement, provided these are shown separately on tax invoices. A tax invoice is required to reclaim VAT as input tax. VAT is not recoverable on the purchase of a car unless specific rules are satisfied. Independent VAT advice should be taken on specific transactions due to the complexities of VAT accounting on motor vehicle funding.
- Vehicle Excise Duty – the vehicle tax disc is renewed by the lessor in operating leases and the new disc will normally be sent to the lessee a few days before the expiry of the previous one. Normally the lessor is the registered keeper of the vehicle. With finance leases the responsibility for applying for road tax renewals remains with the lessee.
- Wear and tear – most leasing companies have a clause in the agreement for operating leases concerning wear and tear. Where the lessee returns the vehicle without first rectifying excess wear and tear damages, the lessee is then in breach of the contract. Any damage recharges subsequently made by the lessor will, generally, be outside the scope of VAT as they are compensatory in nature. It is always important to check the precise terms of the contract hire agreement.
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This article provides general information to be used for your reference only and is not intended as a substitute for financial advice specifically directed at your business and taking account of the particularities of your situation.