Unlike car leasing (which tends to be based around rental agreements for fixed annual mileages), van leasing is often more complex.

Annual mileages can be a lot less predictable for vans and other commercial vehicles, so instead businesses typically have a choice between finance leasing or contract hire.

What's In Lease Rentals?

In the lease rentals you pay the leasing company for:

• Depreciation in the value of the car over the life of the lease
• Vehicle Excise Duty (the 'tax disc')
• Interest Charges on the money borrowed by the car leasing company to buy the vehicle
• The leasing company's profit margin (which might be just the interest charges but could also include something in the final value of the car)
• VAT on the rentals

Differences Between Finance Leasing & Contract Hire

Finance Lease

In a finance lease you repay the full price of the van over the term of the lease, plus interest on the purchase price.

The monthly interest you pay is adjusted down for the previous month's part repayment of the price of the van.

What Happens When The Lease Ends?

At the end of the lease you can usually either;

• keep running the van for further years at a nominal annual fee (say, £100p.a.); or
• get a refund of some of the total lease rentals;

but you can't purchase the van.

The leasing company can only sell the van to a third party, not to the person or organisation that leased the van.

If the van is sold then the refund or rentals to you is typically equivalent to the sale value of the van, less sales administration fees.

Alternatively the refund might be a fixed proportion of the sales proceeds, e.g. 95%.

Contract Hire

In a van contract hire agreement you fix the annual mileage for the van.

You then pay back only the forecast depreciation over the term of the lease, taking account of annual mileage, plus interest on the whole price of the van.

What Happens When Contract Hire Ends?

At the end of a contract hire agreement you return the van to the leasing company. If the van has exceeded the agreed mileage you may be charged an excess mileage fee.

Similarly, if the condition of the van at the end of the lease is worse than might reasonably be expected for its age and mileage, you may be charged for putting right the excess wear and tear.

The leasing company sells the van and takes any profit or loss on the sale.

VAT and Tax Disc

Both finance leases and contract hire attract VAT on the monthly payments.

In a finance lease you'll typically also need to pay the annual Vehicle Excise Duty or 'tax disc' separately and maintain the vehicle too.

The tax disc is usually included in the monthly payments for contract hire, but you will still need to take care of maintenance.

Advantages of Finance Leasing

• No limit on the mileage of the vehicle
• Ability to run-on the van for as long as you need it
• Look after the van and you could 'profit' from a better than expected resale value
• Business tax relief is based on rentals paid each year rather than capital allowances*

Disadvantages of Finance Leasing

• Penalties for ending the lease earlier than the contract term
• VAT on the lease rentals can only be recovered by VAT registered businesses
• * Initial lease rental deposits must be spread over the lease term for tax relief
• Leases must be disclosed on the balance sheet as a liability

Advantages of Contract Hire

• Costs are fixed as long as you adhere to the contract terms
• No exposure to drops in the market value of used vans
• Business tax relief is based on rentals paid each year rather than capital allowances*
• Does not need to be disclosed on the balance sheet (though this is changing for larger businesses)

Disadvantages of Contract Hire

• No opportunity to profit from looking after the vehicle
• Fixed contract term and fixed total mileage with penalties for ending the lease early or exceeding the agreed mileage
• VAT on the lease rentals can only be recovered by VAT registered businesses
• Initial lease rental deposits must be spread over the lease term for tax relief - you can't benefit for tax purposes from paying a large deposit up front*

*Correct at time of original publication.

Lease or Buy?

To see the cost impact of leasing or buying your next new van click here.