Purchasing a business vehicle – should you lease or buy?

When accessing vehicles for business use, company owners have two options: leasing or buying.  

Before deciding which route to go down, there are several important considerations, including the tax planning implications. 

Contents

Leasing a vehicle

Buying a vehicle

Leasing vs buying

Leasing a vehicle

Leasing is a long-term rental agreement that allows you to access a vehicle for a specific period of time in return for regular monthly payments. At the end of the lease period, you need to return the vehicle unless your agreement includes the option to purchase it. 

There are several types of leasing agreements: 

Finance lease (also known as a capital lease):  

This is a long-term finance agreement that allows you to use a vehicle for most of its useful life. The cost of the vehicle plus interest is split into monthly payments. 

The lessee (the business making the payments) is responsible for the risks and the rewards of ownership of the vehicle, including maintenance and repair costs. It appears on the company’s balance sheet as a depreciating asset. 

Examples of when a business might use a finance lease to access a vehicle, including a small food business requiring delivery vans but they cannot afford the full upfront cost to purchase one, and a construction company requiring a fleet of specialist heavy lifting vehicles that are key to its operations. 

Potential advantages of finance leases:  

• long term use of a vehicle without large upfront costs 
• spreads the cost over the vehicle’s useful life 
• lease payments are allowable business expenses, and you can reclaim input VAT 

Potential drawbacks of finance leases: 

• maintenance and repair costs may be high 
• capital allowances cannot be claimed 
• you may end up paying more over time compared to purchasing the vehicle 
• you will likely be subject to mileage limits, early termination fees and restrictions on modifications 

Operating lease 

An operating lease, also known as contract hire, is a short-term finance agreement used to purchase a vehicle. It usually lasts for less than the full useful life of the vehicle. 

Unlike with finance leases, the lessee does not take on any of the risks and rewards of ownership. At the end of the lease, the lessee has the option to return the vehicle or renew the lease. 
 
Examples of when an operating lease might be useful are a business that wants to trial a vehicle before making a long-term commitment, and a business looking to regularly access the latest technology such as electric vehicles, or coffee machines.  

Potential advantages of operating leases:  

• lower lease payments which can help your cash flow 
• you are not responsible for maintenance and repair costs 

Potential drawbacks of operating leases: 

• capital allowances cannot be claimed 
• you may end up paying more over time compared to purchasing the vehicle 
• you will likely be subject to mileage limits, early termination fees and restrictions on modifications 

Buying a vehicle

You have various options to buy a vehicle that you own: 

Outright purchase 

You buy the vehicle directly from the supplier without using finance.  

Hire purchase 

You make fixed monthly payments for a vehicle and you own it once all payments have been made.  

Loan 

You take out a business loan from a bank or other lender which you use to buy a vehicle and pay back the loan with monthly payments. Read our guide to how to get a business loan. 

Examples of when a business might buy rather than lease a vehicle include they intend to use it more than the mileage limit of a lease would allow, they want to include vehicles on their balance sheet to improve their equity position or they want to make modifications to the vehicle which would be complicated to do with a lease agreement.  

Potential advantages of buying a vehicle:  

• full ownership of the vehicle so no limits on mileage etc. 
• able to make modifications when required 
• vehicle lease tax benefits include claiming capital allowances 

Potential drawbacks of buying a vehicle: 

• large upfront cost which could have an impact on cashflow 
• fully responsible for maintenance and repair costs 

Lease vs. buy: A comparative analysis 

Here is a comparison table highlighting the pros and cons of leasing and buying a vehicle: 

	Leasing a vehicle**	Buying a vehicle
Initial outlay	Pros: Initial costs are typically lower as only a small down payment is required. Cons: You may need to pay an initial fee as a security deposit	Pros: Builds equity in the vehicle with a down payment.  Cons: Upfront costs are higher.
Monthly costs	Pros: Lower monthly payments compared to financing a purchase.  Cons: Your monthly payments do not lead to owning the vehicle.	Pros: If you are using financing to buy a vehicle, no monthly payments are required once the loan has been paid off.   Cons: Monthly payments for a loan may be higher than the cost of leasing.
Flexibility	Pros: You can upgrade to a new vehicle at the end of the lease term. Cons: During the lease term, it is likely you will have limited ability to customise the vehicle and you will be subject to mileage restrictions.	Pros:You own the vehicle in full so there are no restrictions on mileage, customisation etc.
Contracts	Pros: Contract terms for leasing tend to be shorter than buying.  Cons: You may be subject to early termination fees.	Pros: There is no contract if you buy the vehicle outright, and if you are using financing, there is no contract once the loan is paid off. Cons: Financing contracts for buying a vehicle tend to be longer than leasing which could impact your cashflow.
Tax	Pros: You can claim lease payments as allowable expenses to reduce your tax payments, but they may be subject to restriction. Cons: You cannot claim capital allowances.	Pros: Businesses can claim capital allowances at a rate based on CO2 emissions. Cons: For limited companies, if a company car is provided to a director or employee for personal use, a business in kind (BIK) tax charge will be applicable.
VAT	Pros: If eligible, you can generally reclaim 50% of input VAT on lease payments. Cons: You cannot reclaim all the VAT on the lease of a car made available for private use by you or anyone else.	Pros: In certain circumstances, you might be able to reclaim input VAT if the vehicle is used exclusively for business purposes.  Cons: You cannot reclaim VAT on the purchase of a car made available for private use by you or anyone else.

**Leasing a vehicle covers finance and operating leasing, not hire purchase. You must be aware that there are substantial differences between finance and operating leases.

Get help with buying or leasing vehicles for your business 

Contact TaxAssist Accountants for a free consultation and personalised advice on the most appropriate business vehicle option for you and your business. Call 01442 268000 or complete our online enquiry form. 

Last updated 3 Jan 2025 | First published 3 Jan 2025

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This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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