If you’ve decided that you need a car for your new business, you’re probably weighing up the advantages and disadvantages of leasing over buying.
The key differences between buying a company car and leasing a company car are ownership and costs. When you buy a car outright, you take ownership of the car immediately.
But when a car is leased, you are in effect entering into a long-term rental agreement and will return it to the car leasing company at the end of the agreed period. Leasing has the advantage of coming without a huge upfront deposit and with low monthly fees.
What are the advantages of buying a company car?
Buying a car can be thought of as a type of investment for a business. Once the car has been purchased, it can be counted as a company asset (and a useful tool, if you can count on it to get you from A to B). When your company outgrows its car, or you need a new one, you can sell the company car on (though you do have to factor in depreciation).
There are tax advantages to buying a car for business, as mileage and other expenses can be written off.
If you buy a car through your company, you can reclaim 50% of the VAT paid on the purchase (only for new cars used exclusively for business purposes).
There are no fees for exceeding mileage limits with a car that you own, as there might be with a leased vehicle.
The problem is that cars, typically new ones, are very often bad investments. According to www.whatcar.com, most cars lose between 50% and 60% of their value in the first three years.
To put that in context, if you bought a new Mercedes-Benz A-Class from a showroom for £39,569.99 in 2020, it could be worth as little as £23,741.99 by 2023 (a loss of £15,828).
What are the advantages of leasing?
Leasing allows businesses to access a brand-new (or newish) vehicle for a smaller upfront payment and lower monthly costs. Leasing offers flexibility too, with contract lengths typically running between 12 months and 60 months.
In these uncertain economic times, when business owners might not be able to predict how their business will look in 5 months’ time, let alone 5 years’ time, a shorter contract might be appealing!
Lowest upfront and monthly costs for newer and more upmarket vehicles.
Can be covered by warranty for the length of the contract agreement, so you won’t be out of pocket if your car breaks down.
Road tax and servicing are included for your monthly fee, making life simpler for the driver.
You won’t lose any sleep over depreciation, as the car will go back to the leasing company at the end of the contract.
If your company is VAT-registered, you can deduct the costs from your profit and claim 50% of the VAT back.
With all that said, you might be wondering why business owners ever buy a company car. In truth, you’re the only person who can decide whether leasing or buying is the better option for your business. We’ll run through some of the things to consider in the next section.
Leasing a car for your business or buying one: which is right for you?
In general, leasing tends to make the most sense if you’re after a new car and an upmarket model, with low upfront costs. This does make sense to many business owners, as your vehicle represents your business so it can be important to be ambitious.
We can see how this plays out with a couple of examples. Let’s say you’re in the market for a used Ford Fiesta for your business. You can buy one outright for £4,000 and you’ll probably recoup some of that value when you come to sell it on.
If you chose to lease a new Ford Fiesta instead, you’d be looking at an initial payment of £1,500 and then ongoing payments of £167.23 per month. Granted, the leased option is new whereas the bought option is used, but there’s a financial argument here in favour of simply buying the car.
On the other hand, let’s say you need something a little bit more impressive than a used Ford Fiesta for your business. Maybe that brand new Mercedes-Benz A-Class we mentioned earlier.
As a business owner, you could lease a Mercedes-Benz for £220.10 per month, with the vehicle under warranty for the whole lease period, without having to worry about the vehicle losing value through depreciation. For a startup, there’s also the undeniable advantage of not having to find a large lump sum for an initial deposit.