Outright purchase wanes

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Company cars that are purchased outright are recorded on a firm’s balance sheet as assets, unlike some other forms of funding.

But outright purchase can tie up the capital an organisation needs for its day-to-day trading.

Outright ownership can be advantageous to purchase cars costing over £20,000 outright under the Expensive Car Leasing Disallowance rules, which wipe out the VAT saving for leasing companies. This would be appropriate for cars for management and senior management grades.

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Company cars first emerged in small but growing numbers back in the early 1970s. They were initially used by employers as an expedient way to reward managers in an employment culture shaped by pay freezes in a country dogged by three-day weeks and industrial unrest.

At the time, one of the few ways to finance these cars was to buy them outright and so began a tradition that remained largely unchallenged until leasing and contract hire alternatives emerged during the 1980s as the volumes of company cars accelerated.

Outright purchase continued as a popular form of funding because for many companies it was the only way they had financed their cars. There was also a prevailing corporate culture where managing directors and finance directors took comfort in knowing that the vehicles in the car park were paid for and owned by the firm.

Some companies experimented with alternative funding options being offered by fledgling leasing and contract hire companies but many got their fingers burnt. However, the fleet funding sector has grown in maturity and sophistication offering bespoke packages to clients which take full fiscal advantages of legislative changes. Consequently, the British Vehicle Rental Leasing Association estimated that, in 2004, only around 35% of company cars were bought outright.

According to Robin Mackonochie, the BVRLA’s head of external affairs, outright purchase has lost its appeal as companies increasingly look at ways of getting the best value and greatest tax efficiencies out of their fleet investments.

But outright purchase and showing the cars on the balance sheet still appeals to many company bosses. Colin Tourick, an independent fleet consultant, explains: "Some organisations choose to buy their own vehicles for a variety of reasons and for many it is simply the approach they have always adopted. However, if you buy your vehicles you normally have to go out and find them and negotiate the deals and many firms find this an admin headache. Outright purchase can also tie up the working capital your company needs for its day-to-day trading."

So while outright purchase still has an important role to play, it is no longer the most popular method of funding as companies increasingly realise the benefits of not owning fast-depreciating assets. The move away from outright purchase was boosted by a change in VAT regulations in 1995 which allow leasing companies to recover VAT on the purchase of new vehicles – a saving they pass on to customers.

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Gary Killeen, general manager of structured financial solutions at GE Fleet Services, explains: "Over the past 10 years, fleets have realised that through changes in the law they can reclaim 50% of the VAT charge on company cars sourced through a finance lease or contract hire which have some personal usage. This rises to 100% on those used purely for business. With outright purchase there is no VAT recovery unless it’s a pool car with absolutely no private usage."

Some strategically-planned purchases, however, actually make financial sense under the Expensive Car Leasing Disallowance rules which apply to cars costing over £12,000 so make a significant difference on more expensive motors. "The tax disallowance for leasing expensive cars, priced on average over £20,000, outweighs the VAT savings. All fleets should certainly be looking to expert guidance and analysis in identifying the best structure for their circumstances. Many companies require a number of different solutions to best meet their fleet acquisition needs," adds Killeen.