Leasing new company vehicles remains one of the most popular ways to fund a fleet.

The advantages mean fleets enjoy a fixed monthly expense and do not carry the residual risk of the vehicles.

When residual decline is written into a lease contract, once the monthly rate is agreed it is fixed regardless of what happens in the used vehicle market.

This provides cost stability, the benefits of which were seen late last year when used values crashed and lease companies were left with assets that were worth less than predicted.

If a fleet had purchased its vehicles outright, it would have been hit with those same losses.

Tying up cash in assets such as vehicles is difficult without expert knowledge as Dan Rees, fleet tax expert at Deloitte, advises.

For example, he says fleet decision-makers must ensure they understand the weighted average cost of capital (WACC) rate.

“This is not a borrowing rate, but a weighted average of the general cost of debt and the general cost of equity in a business,” he says.

“Essentially, the higher this number, the less likely it is to be beneficial to tie up capital in depreciating assets (such as vehicles), regardless of whether a business is cash rich or not.”

Complex calculations are not needed with contract hire.

“When you contract hire, provided you go for full maintenance contract hire, possibly with replacement vehicles built in, you can start to predict a much larger proportion of your future three-year fleet costs,” explains Robert Wastell, managing director of comparecontracthire.com.

Health and safety benefits

There are other benefits such as ease of updating vehicles, which has health and safety as well as tax benefits.

For example, working in partnership with a lease provider means a fleet can shift to a low-CO2 policy more quickly, which will save employees and the business money.

“Leasing cars with CO2 emissions of less than 160g/km is also tax efficient as 100% of the rentals can be offset,” said Wastell.

Also, through contract hire, companies avoid large initial down-payments and lease companies can offer economies of scale.

But it is not all good news, especially where unrealistic terms are agreed or contracts poorly managed.

“If the mileage does not perform in line with contract this can prove expensive with excessive mileage charges,” warns fleet tax expert Alastair Kendrick. “And if the car performs under mileage the leasing concern will make a profit.”

Incorrect mileage forecasting is a common mistake and one fleets need to be wary of making.

However, contracts can be amended if, for example, the vehicles goes to another driver who records a different mileage, advises Wastell.

Maintenance-inclusive contracts are also hotly debated, with questions over the price lease companies pay for the work and what they charge their fleet clients.

Maintenance-inclusive contracts normally include all scheduled routine servicing, any mechanical repair, normal tyre replacement (not punctures), batteries and exhaust replacement, for the life of the contract.

As a result, maintenance-inclusive contracts remain the preferred choice – for example, 75% of Alphabet customers opt for them.

But fleets are advised not to blindly accept the rates charged, but to do their research and benchmark their provider against competitors and third-party maintenance providers.

“Check what the leasing company pays for tyres and other parts,” advises Kendrick.

Wastell adds: “If you want a fixed monthly rental covering all unexpected costs then build maintenance in.” 

If the car covers less than 10,000 miles a year, fleet managers should question whether it is cost effective.

There are other common fleet manager mistakes. “If you take a contract hire arrangement, recognise that if you send the vehicle back early you will get a bill – this will vary by leasing company so read the contract or ask them to clarify this,” warns Wastell.

For large contract hire fleets, Wastell advises choosing an FN50 leasing company or, at a pinch, two companies for dual supply.

Long-term relationship

“My vote would always be sole supply as you can build a long-term relationship and a more favourable commercial arrangement. It is not all about upfront rental costs,” he says.

However, Kendrick disagrees. “If you go with one provider how will you control the costs and prevent rental creep?” he says. “It may be best to consider a dual supply.”

Also, as Kendrick advises, fleet managers need to consider a profit share agreement so if a vehicle makes more at resale than predicted both parties win.

“Also ensure you control the cost of cars – so negotiate discount terms directly with manufacturers/dealers,” he advises. “Test all the costs and policy of pricing reviews. Look at independent data on how the leasing company scores in surveys.”

Also, in the current climate, it is worth investigating the risk that the leasing company may be unable to secure funding for the cars or that it may be subject to a takeover.

Used vehicle leasing: cheaper deals, but fewer funding providers

A growing number of fleets are getting wise to the potential savings of used vehicle leasing – they stand to get all the benefits of new car leasing but at a reduced cost.

This is because leasing rates are based on depreciation and as cars undergo the most rapid depreciation in their first year, a used vehicle should be cheaper to lease.

“We have seen a big increase in used car leasing deals, especially since the latter half of 2008,” said Faye Sunderland, spokesman for ContractHireAndLeasing.com.

“Used cars are often taken on shorter terms, meaning that the fleet has a short-term solution if it is unsure of its needs or funds.”

The car should also be under the manufacturer’s warranty so opting for a two-year lease on a one-year-old car should bring a healthy saving.

If your drivers cover more than 14,000 miles a year it would be wise to investigate maintenance-inclusive contacts, which typically cost £30 per month more for a mid-range fleet car such a Ford Mondeo.

 

But one adviser recommends that for drivers covering less then 10,000 miles it is more cost effective to pay for maintenance independently.

However, the fleet has to source the car itself, rather than just order a new one from the lease company.

Also, only a small number of funders will provide finance for used cars, which means limited funding options and the need for a broker.

In addition, the cost savings have narrowed as residuals have recovered and manufacturers offer more tempting deals on new cars.

“Used car leasing became really popular in late-2008 as the gap between new and used car prices widened,” explains Sunderland.

“But as the supply of quality used cars contracted at the start of this year, this forced the used prices up, thus narrowing the difference between new and used. This means new car leasing is back in the ascendancy with only a few competitive used car deals now available.”

Another option for fleets is to extend the lease on the cars they already have, which means that they don’t have to make an upfront payment for a new car lease.

“If you are a small fleet it might be worth looking at used vehicle contract hire but my advice is probably to stick to new,” says Robert Wastell, managing director of comparecontracthire.com.

Pros and cons of choosing contract hire and leasing

Fixed monthly costs

Car leasing is a fixed-cost form of financing company vehicles. But read the small print – exceeding the mileage limit can be expensive.

It can be more cost-effective to have repairs carried out before returning the car – and charge the costs back to the driver responsible.

Early terminations can also be costly – if an employee leaves then try to reallocate the car rather than return it.

Negotiations

Whether you run a large outright purchase or a leased fleet, ensure you negotiate with the manufacturer or dealer to get the best deal.

This can be done in partnership with the lease provider but the agreements on discounts are between the fleet and the carmaker.

When cars are de-fleeted have a profit share so you benefit if cars exceeded predicted resale values.

No risk

The lease company will predict the residual loss of the car over the term and calculate a rate from this. This means all the risk is with the lease company, but, if RVs fall unexpectedly, expect new contracts to be more expensive to compensate.

Some lease providers will offer a ‘profit share’ where fleets get a share if a car makes more at disposal than predicted.

Free up capital

Leasing a company vehicle instead of purchasing means businesses are not tying up capital in a
depreciating asset.

VAT

It is possible to recover VAT on lease rentals (when leasing the car), but there is a 50% blocking if there is an element of private use.

It is not possible to recover VAT on the purchase price (when purchasing the car) if there is an element of private use.

If a business has a restricted VAT recovery position, it could be beneficial to consider deferred purchase arrangements. 

CO2 tax

The CO2-based corporation tax system allows companies to write-off more of the cost of their fleet against their annual profits if they run more fuel-efficient vehicles.

A leasing company should pass on the benefits of these capital allowances in the form of lower rental rates.