Vehicle depreciation: reducing the impact

Tim Emptage, new business manager at Northgate Vehicle Hire, looks at vehicle depreciation.

Choosing the right vehicle for your business can be as simple for some as which van has the comfiest seat, the most suitable payload, or the right load length. But when trying to work out the best deal financially for your business, it can become a little more complex. Do I want to purchase outright or go down the finance route? Would a brand new vehicle cost me less than a used vehicle? What will my monthly outgoings be with each of these options? Should I agree to maintenance in advance or deal with it as and when?

For most of these questions, with a bit of digging around you can usually find the information required to make an informed choice. However, when it comes to the depreciation of vehicles, how can you ever actually be prepared to budget for it? Depreciation is primarily driven by market forces, and honestly, you will only ever discover the true cost of the depreciation on your vehicle in three to four years’ time at the end of your vehicle’s life.

So, what is depreciation really? The most common misconception is that a vehicle depreciates by 18% year on year, but this is not the case. This is simply the rate at which capital allowance can be claimed and is referred to as writing-down allowance (WDA). Depreciation and WDAs are very different and mustn’t be confused. If in doubt – speak to your accountant!

Essentially, depreciation is the difference between what you buy a vehicle for and how much you can sell the vehicle for at the end of its life. This sounds pretty simple, but in the current economic climate where the residual value of a vehicle can vary significantly, it’s a huge risk for every business – whether operating one van or a fleet of vehicles.

Different vehicle use, mileage and damage influence how badly depreciation affects your finances. Take for instance purchasing a vehicle with finance. If this vehicle depreciates quickly, it could end up being worth less than your outstanding balance before your finance agreement has come to an end. It’s one thing to be left with a low value asset at the end of a finance or hire purchase agreement, but much worse for it to happen part-way through leaving you with a stack of remaining payments for the vehicle’s full value. To put it simply, depreciation causes risk. You could face losing a greater percentage of capital if the market takes a turn for the worse. The current market is in good condition for businesses and there’s been a real growth in vehicle demand. With one vehicle, your business is exposed to some risk from factors like this beyond your control. Now consider the impact on a larger fleet of vehicles, and perhaps the impact of heavy-footed drivers. In an uncertain market you could be looking at losing a small fortune. However, there are measures you can take to reduce the impact of depreciation:

1. General wear and tear – could you be taking better care of your vehicles?

2. Servicing – keep up to date with servicing and keep a comprehensive service record.

3. Suppliers – be savvy when choosing your servicing supplier. Hunt around for the best prices – they can differ widely across the UK.

4. Mileage – can you reduce it? Small changes can mount up in benefits over the course of a few years.

So although there are some things you can do to control depreciation during the vehicle’s life, perhaps consider how decisions around vehicle acquisition can influence the issue of depreciation too. Here are some things to consider:

1. Buying new – this is one of the best ways to lose value instantly. Depreciation in year one can range from 10-40 per cent!

2. Vehicle selection – vehicles from certain manufacturers hold their value better than others. Other factors such as add-ons like in cab features can also play their part in allowing a vehicle to better hold its value.

3. Balloon payments – these can actually leave you worse off, as at the end of your hire purchase agreement you could be faced with a £5,000 payment for a vehicle that is now only worth £3,000 – an instant £2,000 loss.

4. Rental – often a detached option, long-term rental can shield you from depreciation. With some thought and time to research and weigh up the options, there are various ways in which business owners can stop depreciation from hurting company finances too badly.