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Haines Watts Exeter Phone icon 01392 260310

Chasing cars…

The question I am most often asked…

What made you support Chelsea?

A good question and down to my father and grandfather supporting them (although one of my sons is an Arsenal fan so go figure…) but in my business life, the question is:

How should I, a business owner, acquire my next car?

In this blog, I hopefully shed some light on what can be quite a complex area. There are important questions that are linked to this decision, for example should the car be owned privately or in the business? As always, the advice has to be to contact either me or your own advisor for detailed advice on your particular circumstances.

There are several commonly used methods for acquiring a car and I will examine each in turn, giving pros and cons.

Personal or Business Contract Hire

This is an increasingly popular method, the main features being the following;

  • You pay a deposit and agree a lease period
  • Agree an annual mileage
  • Can also agree a maintenance package
  • Business customers can reclaim 50% of the VAT
  • Take delivery of a shiny new motor!

Advantages

    1. You get a new car whose list price you might not be able to finance using other methods
    2. Cashflow – the monthly payments and initial deposit are not excessive
    3. By repeating the process when the deal ends, you are always driving a new or nearly new car
    4. VAT reclaim if put through the business

Disadvantages

    1. You never own the car; this might be important to you
    2. You are locked in a ‘never ending’ cycle of payments
    3. Charges for exceeding the mileage limits can be punitive

Personal Contract Purchase (PCP)

Again, a popular method of finance, it is a hybrid of the contract hire and outright purchase

  • You pay a deposit and agree a contract period
  • Agree an annual mileage
  • Normally would receive a guaranteed minimum future value
  • After the contract period ends you have choices as to how to proceed:
    • Make a large ‘balloon’ payment
    • Hand the keys back and walk away
    • Use the value of the car to arrange a new deal

Advantages

    1. You get a new car
    2. As with contract hire – there is a cash-flow advantage
    3. There is the option to purchase at the end of the contract
    4. Flexible options at the end of the contract

Disadvantages

    1. You don’t own the car until the balloon payment is made
    2. The ‘balloon’ payment can be large
    3. Mileage charges as before

Traditional HP/commercial or private loan

Seen more for commercial vehicles than private cars.

  • A limited deposit, for example 3 months payments
  • You fund the entire cost of the car + finance charges over the length of the agreement

Advantages

    1. You own the car from the start
    2. No mileage charges
    3. Capital allowances can be claimed against tax, if business
    4. Cash-flow advantage over buying outright

Disadvantages

    1. Expensive monthly payments to fund a brand new car in this way
    2. Interest charges
    3. You run the commercial risk of owning this car if things go wrong

Buying outright

 You fund the entire cost of the car less any part exchange

Advantages

    1. You own the car from the start
    2. No mileage charges
    3. Capital allowances can be claimed against tax, if business
    4. No interest

Disadvantages

    1. Expensive to fund re cash-flow
    2. Opportunity cost of using funds i.e. what else could you have done with the money?
    3. Commercial risk

So, which one should you opt for?

My answer to this one is to take account of cash flow and then go with the best deal. The Main Dealers are usually falling over themselves to do deals especially coming up to a deadline or new registration.  They all have different tax treatments too so talk to me first!

Just remember, when you’ve got your Aston, invite me along for a test drive…

Until next time…

Patrick

 

Want to know more? Call us on 01392 260310 or email exeter@hwca.com

About the author

Patrick Tigwell

Patrick has been a Chartered Accountant for over 20 years and during that time has developed an expertise in advising business owners on issues that affect their businesses and not just those of an accountancy nature…

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