Vehicle Finance Options

Many people ask about vehicle finance and what is best. Unfortunately with so many dealers & variations of deals, there is no hard and fast rule; each one just has to crunch the numbers. The most common question is Lease or Purchase? Some are just after the cheapest but there is emotion, preferences, budgets etc.

I will cover the following:

  • Types of finance.
  • Accounting treatment.
  • How to compare the cheapest.
  • Vat treatment. 

 TYPES of FINANCE - with key points

  • HP (Hire purchase)
    • Purchase method - the original finance type, deposit and or trade in required.
    • Pay for the vehicle in full over the life of the finance agreement, which ranges from 2-5 years.
    • Payments will never vary; very good for budgets.
    • No balloon payment.
    • Once paid, the value of vehicle can be used as a deposit on the next, you can also trade up.
  • Contract Hire / PCH (Personal contract hire)
    • The only true leasing option, typical 2-3 years, basically renting the vehicle.
    • Typical deposit is 3-months rental.
    • Lease Company covers all servicing and road tax; (you are responsible for insurance and repairs).
    • Hand the vehicle back, no option to purchase, no balloon payment.
    • There will be a fee if you exceed the pre-agreed mileage as well as minor damages.
  • PCP (Personal contract purchase)
    • Lower deposit required.
    • Lower monthly payment.
    • Has a large balloon payment at the end.
    • Has the option to purchase the vehicle with the balloon payment or hand the vehicle back. Any roll over into new vehicle is a new contract.
    • PIT FALLS OF PCP (I have seen all these issues arise with clients).
      • Because of the lower payments you are borrowing the money for longer, therefore you will pay more £££ in interest.
      • Damage or excess mileage with decrease the final value.
      • If the final value is less than the balloon payment, there is shortfall to cover.
      • If you take another deal, the shortfall is rolled into the next vehicle but a bigger deposit will be required.
        • Repeat this for 2-3 vehicles and you will be paying £20k for a £10k vehicle.
      • If your job or customer base changes which incur unavoidable additional mileage which will cost you extra.
      • If you run into financial difficulty during the contract:
        • You may not be able to afford the balloon payment and need to take a loan to cover the balloon payment (if you can get a loan) meaning you are now paying over 7-8 years in total.
        • Your credit rating may have decreased so you may not get a new deal.
      • The company could out of business. A client with a PCP running with Rover when they went bust.
      • I never recommend this method of finance as too many problems can occur.


Under accounting standards (how we treat the transactions within the financial statements) and tax legislation, all the different types of finance boil down to 2-methods of treatment,

  • Rental - the cost is recorded as expense in the accounts as an overhead (Never an option to purchase vehicle at the end - must be handed back).
  • Purchase - the cost of the vehicle is capitalised meaning it is shown as an asset that the business enjoys the use of to earn money. The asset is then depreciated (written off) as an expense in the accounts over the life of the asset; otherwise your smooth profit would have a big dip every time you bought an asset. This is not good for a variety of reasons including mortgage purposes.
  • The main test in deciding the correct treatment, 'have the risks and rewards of ownership' passed to the new user.


Simply comparing the two deals; but we have to compare like with like; A lease or rental, one does not own the asset and it is returned to the hire company, so you have no vehicle at the end of the deal, therefore when we compare deals we must also calculate that you do not have a vehicle at the end of the deal, so we assume you sell and we factor in selling a vehicle of the same age. Let's assume 0% interest rate for simplicity.

Leasing - we take the rental cost less vat, less tax relief to end up with what I call 'net cost'. (Figure A)

Purchase - we take the original cost, less tax relief on the annual depreciation, less the estimated sale value to end up with our 'net cost'. (Figure B).

Compare figures A & B. To find our estimate sale value we look at what is that vehicle selling for now. E.g. Lease 3-years so we look for a similar vehicle approximately 3-years old.


  • Commercial vehicles: vat is always claimable 100%, whether leasing or purchasing.
  • Cars:
    • Lease - Vat reclaimable 50%.
    • Purchase - vat is not reclaimable 0%.
  • Mixed Vehicles: e.g. Dual Cab pickup are classified as a commercial vehicle if the payload is ≥1000kg.
      • Anything under 1000kg is classified as a car.
      • PAYLOAD is defined as the amount of load it can carry in the rear.