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Business vehicles: Should you lease or buy? And what about diesel?


Some small businesses could not function without their vehicles. For others, choosing cars or vans is just another workplace chore.

But whatever the nature of your business and your vehicle requirements, it is important to give this question a good deal of thought because the right solution can save a lot of money, time and hassle. 

Using your own and your colleagues’ vehicles for business purposes – a so-called ‘grey fleet’ – can work well, but grey-fleet vehicles tend to be older, less reliable and more polluting than newer vehicles, according to research from the British Vehicle Leasing and Rental Association. But if you are going to acquire other vehicles for business use, how do you go about choosing between the different ways to do so?

Aside from purchasing vehicles outright or through a conventional finance deal, an option that has become most popular in recent years is a personal contract purchase (PCP) – in effect, a long-term rental agreement, which may include maintenance services and other extras, but in which you also have the option of buying the vehicle at the end of the contract via a final ‘balloon’ or ‘guaranteed final value’ payment.

The vehicle appears on your balance sheet as a depreciating asset, allowing you to claim capital allowances of 25 per cent per year, and VAT is deductible on rental agreements if the vehicle is used for business purposes only. 

Another option is a contract hire agreement, in which the business pays a fixed monthly sum to lease a vehicle over a fixed period. A single monthly fee can include some or all of maintenance, emergency breakdown cover, road tax and insurance. VAT-registered businesses can claim 100 per cent of VAT paid on maintenance costs and leasing fees for commercial vehicles, plus 50 per cent of VAT on fees and finance of vehicles for private use. 

Warren Purchase, Senior Partnerships Manager at FSB Vehicle Services, points out that a large majority of individuals or business owners who use PCP never actually make the final payment to take ownership of the car, so should at least consider leasing instead. There may also be tax advantages too, although this will vary by tax status, the type of vehicle in question and how it is used. FSB Vehicle Services can provide impartial advice on this issue – visit for more information. 

Fuel for thought

Budget constraints will inevitably be a primary consideration when selecting a vehicle, but beyond this the most important question is how the vehicle or vehicles will be used. “Are they being used in cities, on short, sharp runs?” asks Paul Marchment, SME Development Manager at FSB Vehicle Services.

“If so, petrol vehicles are more efficient than diesel, or a hybrid vehicle might be the right choice. If you are going to be driving long distances on motorways you’re still better off using clean diesel.” 

Lower-emission, alternative-fuel vehicles are becoming a more attractive option for businesses in some locations, as central and local government actions begin to increase the costs of driving older, more polluting vehicles. London has introduced additional charges for older cars driving in the capital and other charges are being planned for cities such as Birmingham, Leeds, Derby, Southampton and Oxford.

But a recent FSB report, entitled Clearing the Air: Supporting Small Businesses in Tackling Air Quality in England, warned that any further air quality measures must not discriminate against small firms, and proposes the extension of a diesel scrappage scheme to cover all small businesses based or operating in such areas.

In July the Government announced long-term plans to ban new petrol and diesel cars from 2040, with Scotland planning to phase these out by 2032; several major car manufacturers have announced plans to scale back and in some cases end production of petrol or diesel vehicles. 

While this doesn’t yet mean you have to consider using hybrid, electric or other alternative fuel vehicles immediately, the chances are that sooner or later you will.

More than half (56 per cent) of UK business vehicle fleets already use at least one alternative fuel type or plan to do so within the next three years, a rise of 6 per cent in two years, according to the Arval 2017 Corporate Vehicle Observatory Barometer, which questioned businesses of all sizes running 3,487 fleets. 

Society of Motor Manufacturers and Traders figures for new vehicle registrations in October also show a big slump in new diesel registrations, down 29.9 per cent year on year. By contrast, registration of alternative fuel vehicles rose by 36.9 per cent, with petrol registrations up by 2.7 per cent. 

Mr Marchment suggests that one reason for these trends is the continuous improvement in electric and hybrid vehicle performance. “Battery technology is getting better, so range anxiety is becoming less of an issue for pure electric vehicles,” he says. Many business owners who use electric vehicles are also more keen to share their positive experiences (see box on page 37). FSB’s report, however, expressed concern that a lack of investment in the national grid will significantly hamper the roll-out of enough new charging stations for electric vehicles, leading to fears that range anxiety could be replaced by charging anxiety.

Extra protection

The other important vehicle-related issue for any small business is ensuring the necessary insurance is in place. As ever, there is a need to ensure all details supplied to an insurer are correct, particularly excesses and exemptions. 

Doug Jenkins, Specialist Business Resilience Manager, Motor, at Axa Insurance UK, emphasises the importance of the relationship a business has with its insurance broker. “They can only use the information they’ve got from you,” he says.

“You need to understand what your claims are, and what you’re doing about reducing them.”

Technology, in the form of telematics, can also help businesses obtain better terms from insurers. These technologies, often controlled using smartphone apps, record how efficiently drivers drive, monitoring speed, mileage and the harshness of acceleration or braking. 

Clearly, small businesses need to do everything they can to reduce vehicle costs, and in such a fast-moving environment it’s important that business owners do their homework. “You need to keep up to date with legislative changes around different types of vehicles and means of obtaining them,” says Mr Purchase. “Seek advice and look at the facts. Don’t just do what you always used to do.” 

Electric dreams

Shirley Paterson is a Green Deal Assessor based in Glenrothes, Fife. Her company, nextGenergy, takes her all over Scotland to advise people on how to reduce energy costs. She does it all using an electric car, a Renault Zoe, purchased in March 2014 using an interest-free loan provided by the Energy Saving Trust (Scotland). 

Contrary to claims that electric cars need a big battery for long journeys, and that they rely on a limited supply of charging points, the Zoe uses only a 22kW battery. Ms Paterson usually gives the car a couple of 15 to 20-minute bursts at charging points over the course of a long day’s drive, but finding somewhere to top up has not been a problem while making journeys all over Scotland.

Recently, she drove to Glencoe to assess six different properties – a 226-mile round trip. The car has carried her 52,000 miles in four years. 

There are now 800 charge points in Scotland alone. Ms Paterson says it is easy to get into the habit of ‘sipping’ extra charges when possible. If using a rapid charge point it might take 15 to 20 minutes to charge the battery, during which time she may make phone calls or find herself a snack. 

She also enjoys a quieter driving experience. “You can have a better conversation with people in the car and I can hear my music better,” she says. “The car is a joy to drive. I’ll never go back to a car with an engine now.”

Tried and trusted

Mark Beasley runs Cathedral Landscape & Fencing. The company, based in Redruth, Cornwall, employs six people and serves clients across the region. It has four vehicles: Fiat, Ford and Toyota tipper trucks and Mr Beasley’s own Land Rover. 

Mr Beasley says he favours diesel vehicles simply because they are efficient and reliable, and available in all the forms the company needs. 

He would consider using hybrid or electric vehicles in future, partly for environmental reasons, but partly with future resale or exchange value in mind.

To date, he has tended to buy new trucks using finance deals and warranties that mean if there is a problem with any of these vehicles they or a replacement will be back in operation rapidly.

“If they’re not on the road, they’re not helping us earn money,” he says.

The Land Rover is leased because Mr Beasley likes having a single fixed payment to cover all his usual and emergency transport needs.

He says he would consider leasing trucks, but has so far found what appear to be good purchase and warranty deals each time he has needed a new vehicle.

“When the warranties come to an end I’ll look at the figures again,” he says. “But the way I’ve done things in the past, with a part-exchange for a new vehicle, has worked well for us so far.”