smallbusiness.co.uk: Helping your business think big

All methods of financing the purchase of a vehicle have advantages and disadvantages. As you suggest you need to consider the best alternative for your particular circumstances. Starting with the alternative you mentioned, Personal Contract Purchase is a method of funding where an individual leases a vehicle for a set period at a fixed monthly charge. At the end of the contract, there is an optional balloon payment which an individual can pay to buy the vehicle otherwise they can choose to return the vehicle with nothing further to pay. The monthly charge is governed by the initial cost of the vehicle, the mileage covered, the period of the agreement and the estimated value of the vehicle at the end of the contract. There will be a further charge if the actual mileage turns out to be higher than that set in the contract. This is usually expressed as an additional cost per mile above the mileage specified in the contract. This can be costly if the additional mileage is significant. Assets purchased –either outright or on hire purchase – are usually eligible for capital allowances. The rate of the allowance will depend on the type of asset, with a first year allowance of 25% in place for motor vehicles. In the case of hire purchase the appropriate interest element is allowable as a deduction against taxable profits. In the case of leasing or hiring the full cost is usually allowable as a deduction against taxable profits. The lease or hire cost of an expensive car (a car where the original market value exceeded £12,000) is restricted. Capital allowances for buying such cars are restricted to a maximum of £3,000 in the early years of ownership, but in effect, full relief for the cost is given eventually. However tax considerations regarding financing choices may be of secondary importance if the business is making losses, which is sometimes the case with start-up businesses. You also need to consider the cash position of the business. Purchasing a vehicle outright may well be the cheapest option, but if you think the business might need finance later on it might be better to finance the vehicle by hire purchase, leasing or PCP. It would be prudent to discuss the issues in greater detail with your accountant so that you fully understand the implications of the various methods of finance – outright purchase, hire purchase or leasing or PCP and the purchase of the vehicle in the context of the business. The ICAEW cannot accept any responsibility for the answers to the smallbusiness.co.uk website. By their nature the questions do not give sufficiently precise and full information to give a personal response. The response is general guidance including where the enquirer might find further and fuller information of relevance to the current enquiry.