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Business leasing of electric vehicles involves renting electric cars, vans, or other electric-powered vehicles for an indefinite length of time to support the transportation needs of a business. Instead of purchasing electric vehicles outright, businesses enter into leasing agreements with the leasing companies or vehicle dealerships, paying regular lease payments for the duration of the lease term.
[Key: Lessor = owner, aka: leasing company, vehicle dealership or financial institution
Lessee = renter, aka: the business, you]
Suitable for sole traders, partnerships or limited companies that don’t want to own the vehicle, a business contract hire for electric vehicles allows businesses to lease EVs for a period of time (usually between 2-4 years) without the lessee having to purchase the car. The lessor retains ownership, and at the end of the lease term, the lessee can typically return the vehicle, renew the lease, or choose to purchase it at its fair market value.
Cost and tax savings. Contract hire often has lower monthly payments compared to financing or purchasing an EV outright, providing immediate cost savings. Tax savings are also a huge advantage with business contract hire, as VAT registered companies can claim back 50% of the VAT on cars and 100% on vans, as well as 100% of the VAT on maintenance costs.
Flexibility. Businesses can access the latest electric vehicle technology without committing to long-term ownership, allowing for easier upgrades to newer models.
Mileage limits. Contract hires may come with mileage restrictions, and exceeding these limits could result in additional fees, so businesses should assess their driving needs carefully.
Wear and tear. Businesses are typically responsible for any excessive wear and tear on leased EVs, so proper maintenance and care are essential to avoid additional charges.
Suitable for sole traders who don’t have the funds to buy a vehicle up front, a finance lease for electric vehicles is a long-term lease where the lessee renting the EV takes on most ownership responsibilities. The lease lasts for most of the vehicle’s useful life, and at the end, the business has the option to buy the vehicle for a set price.
Pros of finance lease:
Ownership. Finance leases offer the opportunity for businesses to eventually own the electric vehicle, providing long-term value and potential tax benefits.
Tax benefits. Depending on the specific laws and regulations in the lessee’s county, businesses may be eligible for tax deductions (similar to those mentioned in the contract hire lease) related to depreciation and interest expenses associated with finance leases for EVs.
Cons of finance lease:
Maintenance and insurance. Businesses are typically responsible for maintaining and insuring the leased EV, adding to the overall cost of ownership.
Residual value. Since the lessee may have the option to purchase the EV at the end of the lease term, it’s essential to consider the vehicle’s expected residual value and negotiate good terms for the purchase.
While both finance lease and contract hire offer businesses access to assets without requiring significant upfront capital, they differ in several key aspects:
1. Financial reporting. Finance leases typically involve recording assets and liabilities on the lessee’s balance sheet, whereas contract hires often result in off-balance sheet treatment.
2. Maintenance and repairs handling. While both options offer maintenance, lessees under contract hire must ensure the vehicle meets return conditions to avoid charges. Pre-end-of-lease inspections and repairs at approved repairers can help mitigate surprises.
3. Mileage management. Contract leases usually impose mileage limits, with excess mileage incurring penalties. Conversely, finance leases typically don’t result in end-of-contract charges for damages or excess mileage.
4. End-of-term choices. Finance leases generally don’t provide options for the lessee to purchase the asset at the end of the lease term. In contrast, contract hire agreements often offer choices to return the asset or extend the lease.
EVs can substantially lower the overall cost of owning a company car. This is primarily because there’s no road tax to pay, and significant savings are achieved on fuel expenses, which typically constitute around 80% of the fuel costs of a conventional fleet.
Electric vehicles are currently exempt from Vehicle Excise Duty (VED) until 31 March 2025.
Electric vehicles are also currently exempt from the Vehicle Excise Duty ‘expensive car supplement’ until 31 March 2025; all other cars with a list price above £40,000 pay this (currently £390 annually) for five years from the second time a vehicle is taxed.
Businesses using company electric cars are also entitled to 100% first year capital allowances, meaning you can deduct the entire expenditure for your car from your profits before tax. This could provide huge amounts of tax relief in the first year.
For businesses located in London, opting for electric company cars or vans could result in annual savings amounting to thousands of pounds due to exemptions from Ultra Low Emission Zone (ULEZ) and congestion charges.
Employees can benefit from a 5p per mile allowance when using an electric company car for business purposes, while charging the EV at work is also exempt from tax.
Choosing an electric vehicle can lead to substantial savings on company car tax, also known as Benefit in Kind (BIK) tax. In the tax year 2022/23, company car drivers only pay a 2% BIK rate. This rate remains consistent for the tax years 2023/24 and 2024/25.
Since the amount of company car tax depends on the employee’s annual salary and the car’s value, opting for an electric vehicle could result in significant savings, sometimes amounting to hundreds of pounds per month. This, of course, is in addition to the salary sacrifice scheme.
Leasing electric vehicles (EVs) for your business offers numerous advantages that can positively impact your finances, operations, and environmental footprint.
Financially, leasing requires a smaller upfront cost compared to purchasing, which helps preserve your capital for other investments. With predictable monthly payments and potential tax benefits, such as deductions on lease payments and possible eligibility for federal, state, or local incentives, leasing becomes a cost-effective option. Additionally, significant fuel savings are realized, as electricity is generally cheaper than gasoline or diesel, and EVs are more energy-efficient.
Operationally, EVs require lower maintenance costs due to fewer moving parts and no need for oil changes, reducing repair expenses. Leasing provides flexibility to upgrade to newer models with the latest technology at the end of the lease term, without the depreciation risk. In addition to this, EVs are exempt from congestion charges and low-emission zone fees in many UK cities, such as London, Birmingham, Manchester and Glasgow, saving your business potentially thousands of pounds annually. Some cities also offer preferential parking rates or designated parking spots for EVs, adding to the convenience.
Environmentally, leasing EVs aligns with corporate sustainability initiatives, demonstrating your commitment to sustainable practices and enhancing your company’s environmental credentials. By reducing emissions and supporting sustainability goals, your business can positively contribute to a greener future. This not only aids in meeting regulatory requirements but also boosts your brand image, positioning your company as environmentally conscious and socially responsible. Overall, leasing EVs provides a modern, sustainable transportation solution while maintaining financial flexibility and promoting a positive corporate image.
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