Navigating the various vehicle finance options for your small construction company can be a nightmare. If the different options are leaving you confused check out our blog to help guide you through.
Hire purchase (HP) is a way of financing the purchase of a vehicle.
You pay a deposit at the start of the agreement and acquire a loan for the remainder. Therefore you're effectively hiring the vehicle while paying off the loan in monthly instalments.
The loan is secured against the vehicle which means you don’t own the vehicle until the last payment is made. Whilst you're making payments, you're not allowed to alter, sell or dispose of the vehicle without the lender’s permission. The lender may be able to take back the vehicle if you fall behind with payments.
You sometimes have an option to lower the monthly payments by adding a final balloon payment at the end of the agreement.
As you're purchasing the vehicle you can claim capital allowances and get a proportion of the cost deducted from your taxable profits. Different rates of capital allowances can be claimed depending on what type of vehicle it is.
You can claim the finance element as a tax-deductible expense.
As this is a 'contract for goods', the whole amount of VAT is charged upfront and, if recoverable, you can reclaim it all in one go at the start of the agreement.
Contract hire is a way of hiring a vehicle, often for a short amount of time.
You hire a vehicle for an agreed duration and make monthly rental payments.
The hirer retains ownership of the vehicle and is responsible for the associated risks. Once the contract has finished, you return the vehicle to the hirer.
The tax works exactly the same as if you were hiring any other plant and machinery for your business. As you don't own the vehicle, it isn't shown on your balance sheet. Instead, you claim the monthly payment as an expense and get the tax relief as you go along.
As this is a 'contract for services', the VAT is charged on each monthly rental and, if recoverable, you can reclaim it on a month by month basis.
There are restrictions on the VAT that can be reclaimed on some vehicles so it is important to check this on a case by case basis.
A finance lease is a way of financing the lease of a vehicle.
You make payments, including any interest, on a monthly basis. You can usually negotiate lower monthly instalments by agreeing a final 'balloon' payment.
At the end of the agreement, you either:
The finance company retains ownership of the vehicle, but you get exclusive use of it (subject to meeting the terms of the lease).
Despite never owning the vehicle it is added to your balance sheet as an asset, but you can't claim capital allowances as you would if you were purchasing it. Instead, you're allowed to claim the depreciation on the vehicle as a taxable expense.
VAT is charged monthly, and if recoverable, you can reclaim it on a monthly basis. There are restrictions on the VAT that can be reclaimed on some vehicles so it is important to check this on a case by case basis.
Personal contract purchase (PCP) is a way of financing either the purchase or the hire of a vehicle.
At the start of your PCP contract, a Guaranteed Future Value (GFV) of the vehicle is set which is the vehicle’s expected value when the agreement ends.
Usually, you'll pay an initial deposit followed by regular monthly instalments, up to the GFV, over an agreed time period, with a loan secured against the vehicle.
At the end of the agreement, the GFV will become payable as a single payment, if you wish to purchase the vehicle. You don’t own the vehicle until the last payment is made.
At the end of the agreement, you have four options:
While you are making payments, you aren’t allowed to alter, sell or dispose of the vehicle without the lender’s permission. The lender may be able to take back the vehicle if you fall behind with payments.
The tax and VAT implications of PCP depend on the level that the GFV is set at and the anticipated market value at the end of the contract.
If the GFV is set at or above the anticipated market value, the contract will be deemed a 'supply of services' and VAT is charged on each instalment. If recoverable, you can therefore reclaim it on a monthly basis.
The tax treatment is the same as if you were hiring the vehicle.
However, if the GFV is set below the anticipated market value, such that any rational person would choose to buy it, the contract will be deemed a 'supply of goods' with a separate supply of finance. The total VAT is therefore due at the beginning of the contract.
The tax treatment follows that as if you were purchasing the vehicle.
A loan allows you to borrow a fixed amount over a fixed term at a fixed rate of interest. This in turn means you have the funds available to purchase the vehicle outright.
Purchasing in this way gives you immediate ownership of the vehicle.
You make regular monthly payments during the agreement to cover the amount borrowed plus any interest and fees. The interest rate is fixed so you’ll know exactly how much you’ll be charged from the start.
The tax and VAT treatment follows that of HP.
Note: Tax and Class 1 A National Insurance will be due if a vehicle is available to an employee or director for personal use. This will apply to whichever vehicle finance option you choose.
If you'd like to discuss the accounting and tax implications of the various vehicle finance options for your small construction company, book your free 15-minute discovery call today.
