The cost of financing the vehicle is spread over the contract period, cashflow is improved as no large capital outlay (as with outright purchase ) is required.
Cost Of Finance
Leasing vehicles through a corporate sponsored programme, it would be expected that finance costs would be less than those charged to individuals accessing finance through conventional retail sources.
In line with cash outflows these will be neutral but dependent on the structure of the specific scheme there may be issues in the event of early termination.
Setting a fixed duration and mileage at the start can be difficult. An Eco scheme can enable changes through the term of the contract, it may be possible to amend these parameters part way through. Amending the contractual parameters enables you to change the mileage and duration as required. However these amendments would require the credit sale agreement between the lessor and the employee to be revised and it should not be underestimated the potential challenges in getting any revisions to a contract formally executed in a compliant and timely manner.
VAT Recovery - NO Input VAT will be recoverable on the purchase price and no input VAT is chargeable on the finance rental as these charges are paid by the employee.
Residual Value Risk
Residual Value Risk - Risk and reward associated with the value of the vehicle at the end of the period of ownership is retained by the employee but financed by the employer, you are not protected from any adverse movements in the used vehicle market. However in certain circumstances a ECO scheme agreement can be structured in a way that all vehicles are sold back to the leasing company at a pre determined balloon value (Residual Value) thus transferring the residual value risk back to the leasing company.
Tax Deductible Expense
Tax deductible expense – Costs are all passed through payroll and hence fully deductible.
Vehicle Management and Administration
It is typical that the management and administration (in full or part) associated with this acquisition method is provided by a specialist Fleet management company.
Early Termination Costs
Early Termination Costs - varying formats for calculating charges in the event that a vehicle is returned prior to the agreed contract end date exist. In some circumstances these cost may reflect the actual market adjustment required to cover costs associated with the early return of the vehicle and may include additional costs levied by the lessor. It should also be noted that tax and national insurance would be payable by the employer if these costs had not been reimbursed by the employee.
Excess Mileage and Damage Charges
Excess Mileage and Damage charges - when a fixed monthly rental is calculated the services charged for and depreciation recovered in the finance rental is based on the contracted mileage and assumed return condition at the end of the contract, if the return mileage is greater than the contracted mileage or the return condition is below the industry standard for a vehicle of similar age and mileage than additional charges will be levied to compensate the financing company.These charges should reflect market conditions and therefore would be in line with other acquisition methods, however depending on the finance company may include some form of incremental administrational charge or penalty.
It should also be noted that tax and national insurance would be payable by the employer if these costs had not been reimbursed by the employee.
Option To Own The Vehicle
As this product is structured as a conditional sale agreement, on payment of a final balloon invoice the employee could then retain the vehicle as set out at the onset of the contract.
Also an option may exist for the vehicle to be passed back to the lessor with the final balloon obligation being offset against the pre agreed repurchase value.