How does business car leasing work? BCH explained

Leasing a car or van as a business – at least in terms of the process itself – isn’t too dissimilar from personal leasing. However, there are a few fundamental differences between business contract hire (BCH) and personal contract hire (PCH) when it comes to eligibility, the potential tax benefits and some of the finer details of the respective contracts.

In this guide, we’ll go through the basics of business leasing in detail, including how it works, the benefits and the all-important comparison of business vs personal lease options.

If you’d like to get to grips with leasing as a whole first, take a look at our guide to how car leasing works. If you’d rather get on with finding a deal, you can get started with our business leasing range straight away.

What is business car leasing?

A business lease, otherwise known as a business contract hire (BCH), is a type of lease agreement available to sole traders, partnerships, limited companies and LLPs. The agreement is essentially a long-term rental taken out in the business’s name and consists of fixed monthly payments for the duration of the lease, which is typically two to four years.

The process of business leasing is very similar to personal leasing, otherwise known as personal contract hire (PCH), with respect to how the contract and payments are structured. The big differences between the two are who can apply for one (see the list at the start of this section) and the tax benefits, with VAT-registered businesses able to claim up to 100% of VAT back, depending on how they use the car.

Can I get a van on a business lease?

Yes, many business leases are vans or light commercial vehicles (LCVs). The flexibility, tax and cost-management benefits of BCH packages make running an LCV via a business lease a popular option for self-employed tradespeople and companies alike.

Take a look at our van leasing options for more information.

How does business car leasing work?

The leasing process

Your typical BCH deal will be structured as follows:

• Initial payment: this is an upfront payment that is a multiple of the fixed monthly payments to follow. Common initial payment amounts are three, six or nine months’ worth, but you’ll likely also have the option to pay no initial payment at all, instead spreading the total cost of the lease across highly monthly payments. That’s your decision to make: make a higher initial payment to get lower fixed monthly payments, or go the other way and take a lower initial payment figure in exchange for higher monthlies.
• Monthly payments: these are fixed monthly instalments that are paid for the duration of the lease that cover the remainder of the total cost of the lease owed after you’ve decided on the initial payment. Again, these can be tweaked to be higher or lower via the initial payment amount you choose, as well as the length of the lease term.
• Duration of lease: most business leases last 24-48 months, but you have the option to go anywhere between 12-60 months at 12-month intervals.
• Terms: the lease is taken out in the name of the business, but at no point is the vehicle owned by it. Leasing is effectively a long-term rental, so the lease company will be the registered keeper of the vehicle throughout the contract, and there’s no option to take ownership of the vehicle at the end of the deal. Because of this, BCH deals come with various terms and conditions surrounding annual mileage and the vehicle’s general condition (see the usage and restrictions section below) that you’ll need to stick to in order to avoid additional charges.
• End of the agreement: at the end of the contract, the car is returned to the lender with no further obligation, unless there are additional mileage/wear and tear charges to pay as per the terms of your agreement. Options at the conclusion of a BCH deal are often a little more open-ended than PCH in relation to renewal and upgrade routes.

Can I lease a car through my business?

Both business owners and employees are eligible for a business lease. In both instances, the lease is taken out in the name of the business. If you’re an employee, the business you work for will need to offer a company car or salary sacrifice scheme for you to benefit. Car leases for business owners can be anything from an individual lease for a small business through to a full company car fleet for larger organisations.

Benefits of leasing a car as a business

Financial advantages

• Lower upfront costs: regardless of whether you’re looking for one vehicle or a full fleet, leasing removes the need for significant expenditure of capital upfront. Spreading the cost across fixed monthly payments for multiple years is a blessing for cash flow purposes. As a business, you’ll know exactly what you need to pay and when for the duration of the lease.
• Tax benefits: potential tax benefits are the biggest difference between business and personal leasing. On a BCH package, VAT-registered businesses can claim 50% of VAT back if the vehicle is being used for commercial and personal purposes, or 100% if the vehicle is used for commercial purposes only. Likewise, any maintenance package added to the deal is eligible for 100% VAT relief. Furthermore, monthly lease payments from the business’s books can be treated as a deductible business expense, which can reduce taxable profit.

Operational benefits

• Access to newer models: one of the biggest selling points of leasing is the ability to move onto a new car every few years. That enables a business to keep its fleet up-to-date with models that project a more efficient, sustainable and professional image – not to mention an appealing company car scheme for talent acquisition purposes.
• Reduced maintenance responsibility: a maintenance package can be added to any BCH deal as part of the fixed monthly cost and is a recommended addition for any business leasing fleet. This takes virtually all administrative responsibility away from the business, with no concerns about unexpected repair costs going forward.

Business lease vs personal lease

Why is a business lease cheaper than personal?

When shopping for business and personal lease deals, you’ll notice that business options tend to be cheaper. This is because of the tax benefits – PCH deals include VAT as part of the advertised cost, while equivalent BCH deals, which save at least 50% on VAT, don’t.

One thing to note for business car leases for personal use is benefit-in-kind (BiK) tax. If you’re an employee and get a vehicle as part of a company car scheme at your business, it’ll be considered a benefit in kind and subject to BiK tax. This is calculated based on your lease vehicle’s P11D value, CO2 emissions and your income tax rate. In the case of all three factors, the higher the number, the more tax you’ll pay.

BiK tax can be anything from a few hundred pounds to thousands across the year, depending on the car you choose. This is why most company cars are electric or hybrid as to fit into a lower BiK bracket. Of course, if you do have a company car, the BiK tax will be dwarfed by the cost-benefit of the lease itself, but it’s still something to be aware of.

Usage and restrictions

No matter what type of lease you go for, there will be restrictions in the contract regarding things like the vehicle’s return condition, fair wear and tear, and annual mileage.

The annual mileage limit is something you can choose (with your lease cost adjusting according to how high or low you go), but on a typical PCH deal, it sits around the 10,000-mile mark. Go over that, and you’ll pay excess mileage charges at the end of your deal – usually a few pence per mile.

The same rule applies to business leasing but, because it’s anticipated you’ll be doing more mileage in a commercial-use vehicle, it’s generally more affordable to opt for a significantly higher mileage limit as part of your deal.

Considerations for leasing a car through your business

Eligibility and requirements

Business leases are available to sole traders, partnerships, limited companies and LLPs. As long as your business is VAT-registered, you’ll be able to access the VAT benefits. In most instances, your business will need to be at least two years old to apply for a business lease deal.

If you’re an employee, you can’t just apply for a BCH deal off your own back. You’ll need your employer to offer some kind of scheme, be it a company car benefit or salary sacrifice option, to get on board.

Choosing the right vehicle

Picking the right vehicle is important for any lease, but especially so for a business contract. These are the main things to consider:

• Find a vehicle that fits your budget, both in terms of monthly and total payments as well as wider running and insurance costs.
• BiK tax can be substantial on vehicles with high CO2 emissions. Pick a vehicle with low emissions to lower your BiK tax.
• Be aware that different vehicles carry different VAT implications, and only certain vehicles offer the best possible tax benefit.
• Consider company image when choosing. Elements like a professional appearance, sustainable profile and consistency in presentation across a fleet are all important.
• Your vehicle needs to perform capably for business operations. Think about your requirements for space, storage, reliability, comfort and scalability for the future.

End-of-lease options

At the end of the lease, the car is returned to the lender with no further obligation on either side. If the vehicle is damaged beyond what’s considered reasonable wear and tear or you’ve exceeded your agreed mileage limit, there may be charges to pay.

There’s no option to purchase at the end of a BCH deal, but business leasing packages do tend to be more open-ended for businesses looking to continue servicing their fleet. You’ll likely have a range of options available to you, including the option to renew existing leases, upgrade to new ones or explore alternative routes (for example, if you wanted a deal with a purchase option, business contract purchase (BCP) is the business equivalent to personal contract purchase (PCP) and offers the option to buy at the end).

Business lease vs personal lease: key differences summarised

• Eligible applicants: business leasing is only available to owners and employees of sole traders, partnerships, limited companies and LLPs. Personal leases are available to any individual with suitable credit.
• Tax implications:  VAT-registered businesses can claim up to 100% of VAT back on business lease payments, depending on how the vehicle is used (commercial and personal use: 50%. Commercial use only: 100%). 100% of VAT on maintenance packages can also be reclaimed. Lease payments can also be deducted as business expenses, reducing taxable profit. There are no tax benefits with PCH.
• Mileage restrictions: BCH deals usually factor in larger mileage allowances than PCH to reflect the purpose of the lease.
• Maintenance: maintenance and servicing packages, either included as part of the lease cost or offered as an optional bolt-on, are more commonplace in business leasing.
• Insurance: businesses leasing multiple vehicles can cover them all under a fleet insurance package, saving money on insurance costs.

How does a business lease work with Hippo?

Business leasing is a big part of what we do at Hippo. We work with the full spectrum of business operations, from SME owners looking for a single vehicle to major organisations looking to overhaul their fleets and optimise their costs.

If you’re interested in what a business lease might look like for you, you can start with our business leasing range online, or give us a call to get a tailored quote today.