Leasing vs Buying — Six Questions Worth Asking

Wednesday 24th April 2024

Over 2 million cars and vans are currently leased by UK businesses and the BVRLA’s (British Vehicle Rental and Leasing Association) most recent Leasing Outlook report reveals a six-year high.

Why are so many companies switching to leasing as their preferred method of vehicle finance? There are plenty of reasons we could mention but, if you’re still buying cars and vans outright, here are six questions worth asking.

Am I getting the best deal?

We all like to think we are good negotiators, and in fairness we will occasionally find ourselves in just the right place, at the right time, to strike a great deal. However, the key word here is ‘occasionally’, because one-off, or low volume, purchases generally provide little room to maximise savings on a consistent basis.

On the other hand, as a business that buys over 20,000 cars and vans every year, our direct manufacturer relationships and overall buying power mean we can negotiate consistently strong discounts on the widest range of vehicles. Whether you lease or buy, it’s this baseline cost that is one the biggest influencers in determining what it really costs to run any size of fleet.

Is depreciation worth the risk?

The true cost of a vehicle is determined by the difference between the purchase price and its value when sold or traded in. Known as depreciation, the rate at which this happens varies wildly and is largely dependent on factors outside of your control, such as the timing of new model releases, vehicle availability, and overall market conditions.

For example, as the UK emerged from the COVID-19 pandemic, a shortage of new vehicles coming into the market forced the average price of second-hand cars up throughout 2021, 2022 and into the first half of 2023. Good news for sellers, not so good for buyers. But then things started to change.

February 2024 saw an 8.3% fall in used-car prices (year-on-year and like-for-like). This comes on the back of a 7.5% fall in January and continues a downward trend that started back in September 2023. There are also individual models which may experience an even bigger drop in value.

This is particularly true of electric vehicles, where the second-hand market is still in its infancy and future prices are likely to be significantly affected by decarbonisation legislation — such as the ZEV mandate — and future technological developments.

It’s here that leasing offers a significant advantage over purchasing because, assuming you stick to the agreed usage parameters, the future resale value of each car or van is set in stone. You are, in effect, outsourcing the depreciation risks to a third party that can mitigate these market variations by spreading the risk across thousands of vehicles and a wide portfolio of makes and models.

Working out tax

Is buying or leasing more tax efficient?

The tax implications of buying or leasing varies between companies but, with monthly payments generally fully deductible as a business expense, leasing offers a straightforward way to reduce taxable income. The bigger difference comes when we take a look at VAT.

VAT is levied at 20% on all new vehicles and this can only be reclaimed if you are able to prove that there is no personal mileage.

Whilst vans are assumed to be for business use only, passenger cars invariably have some degree of personal use. As a result, it is incredibly difficult to reclaim any of the VAT paid when buying vehicles outright.

With Contract Hire (the most popular form of car leasing), at least 50% of the VAT can be reclaimed on rental payments, rising to 100% if the vehicle is used for business purposes only. This means that for many VAT-registered businesses, leasing works out to be far more cost effective than buying.

What happens if I damage the vehicle?

Whether a vehicle is owned or leased; any dents, scratches, or other damage will have a negative impact on its resale value. If the vehicle is yours to sell, you can decide whether to make any necessary repairs and obtain a fair market price or forgo the repair work and accept a lower valuation.

The same basic principle applies to leasing. Monthly payments are calculated on the assumption that the vehicle will be returned with no more than fair wear and tear. If this is not possible, you face a similar decision: undertake the repairs yourself or hand it back and pay a final bill based on the work required.

To ensure drivers are aware of the expected condition of the vehicle on return, we use the BVRLA's Fair Wear and Tear guidelines which gives full explanations and descriptions of damage and what is considered fair.

Working out costs

Is buying or leasing a better use of funds?

Any finance agreement is likely to incur a form of interest or charges so the real question is, is it better to use available funds to buy vehicles or should you invest it elsewhere?

The decision is yours but, even if we put aside the depreciation risks, lack of buying power, and unrecoverable VAT, many businesses find that they can make their money work much harder for them by investing in people or technology, as well as retaining the ability to fund future innovation and growth.

Does leasing restrict my options?

Business rarely stands still. While you may instinctively feel that ownership gives you more control, leasing can be as agile and flexible as you need it to be.

For example, by creating a ‘mileage pool’ covering all — or some — of your vehicles, there’s no need to worry about individual drivers clocking up a few more miles than originally planned. If the size of the pool needs to be increased, it’s an easy adjustment to the contract.

To help you manage new starters and leavers, individual vehicles can be reassigned to a new driver. If you need to keep a vehicle for a few extra months but won’t need it long-term, the original contract can generally be extended, often at a reduced cost.

If you no longer need a particular vehicle, rather than have all the hassle of selling it and accepting the current market rate, you can simply hand it back and pay the early termination fee specified in your contract — which is generally a percentage of any outstanding payments.

Cars driving on motorway

The final word on leasing vs buying

Every fleet is different but, when you put it all together, the benefits of leasing will generally outweigh any perceived cons.

If you haven’t evaluated your options for a while, why not speak to one of our experts to see how a switch to leasing could reduce the cost and risk of running your fleet?

Switching to Contract Hire helps you to:

  • • Reclaim 50% VAT on all rentals (100% for vehicles with no personal use)
    • Free up capital to invest in future business growth
    • Outsource hard-to-predict depreciation risks
    • Budget better with fixed-cost, inflation-proof, vehicle finance and maintenance
    • Take advantage of increased buying power and manufacturer discounts

The real-world benefits of switching to Contract Hire

With a fleet of nearly 400 business-critical vehicles spread across the UK, Novus Property Solutions could see the challenges and limitations of owning and running their own fleet.

By working closely with the Novus in-house team, we were able to create a tailored Contract Hire solution designed to maximise manufacturer discounts, minimise downtime, and increase the overall efficiency of their mobile operations. To see how we did it, just watch our video case study and then give us a call on 0344 463 2900 to find out more.

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