A guide to purchasing a vehicle through your business

Whether you need a fleet of vehicles for your delivery services, or simply a reliable car for business meetings and client visits, investing in a vehicle can be a significant decision for any business owner.

In this guide, we'll walk you through everything you need to know about purchasing a vehicle through your business, from the types of vehicles you can finance to tax considerations and the application process.

What types of vehicles can I finance?

Business vehicle finance isn't limited to cars; it encompasses a wide range of vehicles used across various industries. Essentially, if the vehicle is used primarily for business purposes, it can typically be financed through your business.

Here’s a few examples of the types of vehicles you could finance through your business: 

• Vans

• Trucks

• A fleet

• Cars

• Tractors

• Buses/coaches

• HGVs

What are the different types of business vehicle finance?

If you’re looking to get a vehicle for your business, there are several financing options available. Each option has its own pros and cons, so it's important to understand how they work before making a decision. Here are the main types of business vehicle finance:

1. Finance lease

A finance lease is a popular option for businesses that want to use a vehicle without owning it outright. With a finance lease, you make fixed monthly payments to use the vehicle over a period of time. At the end of the term, you typically have the option to either return the vehicle, extend the lease, or purchase the vehicle at its residual value.

2. Hire purchase

Hire purchase is another common financing method where you pay for the vehicle in instalments over a fixed period. Unlike a finance lease, hire purchase is for business owners who  have the intention of owning the vehicle at the end of the agreement. Once all payments, including any interest, are made, ownership of the vehicle is transferred to your business.

3. Contract hire

Contract hire is similar to a finance lease but typically involves longer term agreements. You’ll pay fixed monthly rental fees for the use of the vehicle over an agreed-upon period. Unlike finance lease, you don't have the option to buy the vehicle at the end of the contract. Instead, you return the vehicle to the lender, and if you need a new vehicle, you can enter into a new contract.

4. Operating lease

An operating lease is a flexible option for businesses that need vehicles for a shorter period or want to avoid the risks associated with ownership. You pay fixed monthly rental fees for the use of the vehicle for an agreed-upon period, typically shorter than the vehicle's useful life. At the end of the term, you return the vehicle to the lender without any further obligations.

How to decide whether to lease or finance your vehicle

If you’re trying to decide whether to lease or finance a vehicle, you should consider factors such as your budget, how frequently you’ll use the vehicle and whether you would prefer to own it at the end of the term. Leasing may offer lower monthly payments and the ability to upgrade regularly, but financing provides eventual ownership and potentially greater long term savings.

What are the benefits of financing a vehicle through your business?

Here's a breakdown of some of the benefits of financing a vehicle through your business, rather than buying it outright:

• Financing a vehicle through your business allows you to spread the cost over time through manageable monthly payments. This helps to reduce the strain on your cash flow.

• Depending on the finance option you choose, you may be able to deduct some or all of the vehicle's costs, including interest payments from your Corporation Tax (more on this below).

• Leasing a vehicle can often provide the flexibility to upgrade to newer vehicles regularly, ensuring your business always has reliable transportation.

• Financing a vehicle through your business can help establish or strengthen your business' credit profile. Timely payments demonstrate your business' ability to manage debt responsibly, which can enhance your credibility with lenders and potentially qualify you for better financing terms in the future.

Tax considerations of vehicle finance

Here are the key tax considerations your business should be aware of:

Capital allowances

If you finance a vehicle through your business, you may benefit from Corporation Tax relief through Capital Allowances. If you choose to finance through hire purchase, you'll own the vehicle at the end of the agreement. This not only allows you to claim up to 100% tax relief through Capital Allowances but also enables you to claim interest paid in your monthly repayments. As a result, your business profits decrease, leading to potential savings in Corporation Tax.

On the other hand, leasing a vehicle means you won't own it. Currently, this does not make it eligible to claim Capital Allowances. However, you can still claim monthly rental payments, offering opportunities to reduce your Corporation Tax liability. 

In the UK’s Spring Budget 2024, Jeremy Hunt announced that Full Expensing Capital Allowances would be extended to vehicle leasing. The legislation for this is yet to be published, but it’s worth bearing in mind if you’re considering leasing a vehicle. You could speak with your accountant when considering finance to be clear on the current legislation and tax relief that applies.

What do you need for a successful application? 

To successfully apply for business vehicle finance, you'll typically need:

• Proof of identity and your business address

• Financial statements or accounts to demonstrate your business' financial stability

• Details of the vehicle you wish to finance, including its make, model and price

• Lenders will want to assess whether you’re creditworthy, so you’ll likely need a good business credit score

• Some lenders may require a deposit or additional security

Your vehicle finance checklist 

If you're looking to purchase a car using vehicle finance, use the following checklist: 

1. Choose the vehicle you want to purchase 

2. Have a budget in mind, think about your monthly repayments and how long you want the term length to be 

3. Prepare an assets and liabilities statement to show the lender any assets that you own and any current debts.

4. Provide any security you’re willing to offer, such as a personal guarantee. In most cases of vehicle finance, the lender will use the vehicle you are purchasing as security for the lease. 

5. Decide what type of loan you want. Before making a decision, you can work with a funding specialist who can help you determine the option that works best for your business.