Lucky you – you are thinking of getting a car and you run/own your own business so you are wondering what you can and can’t do in regards to leasing a car. Let’s go through it.
Car Leases – Hiring.
A car lease is very similar to when you hire a car when you go on holiday – just for a lot longer. You have an agreement with the lease company that will say how long you are leasing the car for and the monthly cost of hiring that car. The cost is effectively calculated considering the value of the car when you lease it, as compared to the value of the car when you return it. Plus of course the profit for the lease car company. The value of the car when you return it is known as the Guaranteed Minimum Fair Value (GMFV) which you do not really have to worry or think about – we just like to share extra info!
So – the lease agreement will state how long the lease is (e.g. 48 months) and the monthly amount to pay for you to lease-hire the car, say £199.00+vat. That’s it. As long as you look after the car in a normal way (don’t enter any car rallies for example) then that should be the total costs you will incur. Just like with other lease agreements any damage to the car will be assessed according to the fair wear and tear policy. I.e. a car is expected to age normally over the four years (48 months) , but not expected to be returned with a car door missing – to give an extreme example.
Car leases – Purchasing
Consider the details under car leases – hiring and rather than returning the car you keep it having made a final (substantial) payment. This is car lease – purchasing. There is an alternative to the final payment (known as a balloon payment) and that is to simply renew the car lease and take another new car. And why not!
What costs will I incur outside of the actual lease costs?
Really good question. You should also consider:
Car vehicle maintenance and servicing (ask if this is / can be included in the cost of the lease)
Running costs – fuel etc.
What are the accounting aspects to be considered?
Well you are geeking out now, reading this far.
You will need to assess if your lease is an operating lease or a capital lease.
You will consider recording in your accounts the Asset, Liability and the Expense. As well of course as the credit to the bank as you make the actual payment.