When you need a new van there are many decisions to be made, but the biggest one will be how you plan to pay for it. Dan Powell of Honest John Vans explains the options.
Buying outright with cash
When it comes to getting a new van, many builders prefer the tried and trusted route of buying with cash. One of the key advantages to owning a van outright is you have no additional outgoing payment, or a fixed cost to repay the loan used to buy it. This makes it easy to budget over a long period. Also, a new or nearly new van will come with a full manufacturer’s warranty that guards against most mechanical problems with the van.
Financially, owning your van means you can offset the capital allowances against tax if the van is only used for business purposes and not personal use. If the van was bought using a bank loan, the interest charges can be reclaimed against tax too. All of the van’s running costs can also be offset against tax when it’s only used for business. You can also claim your own capital allowances and you don’t have to be VAT-registered.
The downsides to owning your van are you are responsible for every element of its upkeep and it starts losing value the moment you drive away from the dealer’s forecourt.
Contract hire gives you a fixed monthly cost that makes budgeting easy and it removes the cost of a van from the company’s books. It can also help free up vital capital by lowering the company’s outgoings because contract hire needs only a small initial outlay of money to start the deal.
Another plus of contract hire is you don’t have to think about what to do with the van at the end of its life. The hire company will simply take it away and it’s up to you to decide if you want to replace it with another van on a contract hire scheme or walk away. You also don’t bear the cost of depreciation of the van. Most contract hire schemes include a servicing and maintenance package, so all of your routine services will be paid for. This makes it easy to budget as you will have no unexpected costs.
The downsides to a contract hire option are you must abide by the terms of the contract. Most schemes will be based on an agreed mileage over the duration of the contract and returning the van in a good condition. There will be penalties for returning the van with damage or too many miles, so always check what the fees are before you sign up.
A finance lease agreement has many similarities to contract hire, but you can never own the vehicle at the end of the agreed term as it must be sold to a third party. Finance lease deals are usually only offered to VAT-registered businesses, so may not be available to sole traders. The monthly payments include all running costs other than fuel and you can claim up to 50% of the VAT payments with the vehicle shown on the company’s balance sheet.
For some businesses, finance lease deals make the most sense, but you need to be aware that interest rates can vary and if rates go up, so will your monthly payment. You may also be charged documentation or administration fees at the beginning of the deal. A key point for many businesses is a vehicle funded by a finance lease deal appears on the balance sheet and is regarded as a debt. In contrast, a contract hire agreement is seen as an expense by the tax and is kept off the balance sheet.
Which method you should choose to pay for your next van will depend on the size of your business, usage and plans for the future. It’s always wise to check the terms and conditions of the agreement before you sign up and work out what type of van you need and how many miles you’ll cover over a year. That way you’ll find it easier to shortlist the deals and vans that suit your business needs.
Need a bit more help deciding on the method for you? Check out the table below to see how the different options measure up against each other.
|Buying outright||Contract hire||Leasing|
|Available to all businesses||Yes||Yes||No|
|Own the vehicle outright||Yes||No||No|
|Fixed monthly payments||Yes||Yes||No|
|Annual mileage limits||No||Yes||Yes|
|Can claim capital allowances against tax||Yes||No||No|
|Covered by manufacturer’s warranty||Yes (but only for 3 or 4 years)||Yes||Yes|
|Depreciation costs of the van||Yes||No||No|