Purchase Company Van out of Cash or on HP

Purchase Company Van out of Cash or on HP

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Limited company client is wanting to purchase a company vehicle. I advised on a (white) van as VAT can be reclaimed here as opposed to car. However, client can afford to buy via cash from company bank account but would it be better to buy via HP? Are there any tax advantages doin it this way? Reason I am thinking this is to free up profits for distribution via dividends - advice very much appreciated.
Sue Stannard

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By neileg
04th Nov 2005 12:30

Just goes to show
There will always be debate about this kind of subject. Simon feels that his case is clear cut but I don't.

We run a fleet of 800 mostly panel vans and tippers under 3.5 tonnes. We have real life experience of ouright purchase, contract hire, spot hire and leasing.

By far and away the cheapest option for us is outright purchase. Our vehicles are mechanically maintained to a very high standard, but their cosmetic condition is not so good. When returning our vehicles under contract, either contract hire or leasing, we have suffered very badly from the cost of refurbishment under these contracts. Conversely, when our outright purchase vehicles go to auction, the high standard of maintenance and detailed service records mean that we achieve excellent sale values, as buyers are less concerned by the odd ding or rust spot.

I am not suggesting that our case is typical, I am just illustrating that circumstances alter business cases, sometimes dramatically. There is never a one size fits all solution.

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By martinfoley07
04th Nov 2005 16:15

....oh dear....
...Simon, we seem to have upset you, which was not the intention.
I think we NEARLY agree
(i) shop around
(ii) yes, of course, there are cost/benefits to the effort put into shopping around.

I had taken (correctly or incorrectly is another matter) your posting to be paraphrased as "look no further than contract hire".

If your posting is more accurately paraphrased as "based on my knowledge I would expect a 90% probability the best deal will come from a contract hire offer" as regards quotes for high mileage white vans, fair enough. We agree there NOT a guarantee that contract hire quotes will provide the best deal in each case, but for reasons given, concentrate your requests for quotes in that area.

This is in context - every small business always asks "what's the best way of buying/financing a vehicle". Frequently one answer is given, which is crazy - the deals are out there to be tested. The structural reasons why one route/methodolgy should in a theoretically perfect world be the financial optimum do not always translate into better terms.


(as a side issue, it is indeed remarkable that so many micro companies, as opposed to sole traders/partnerships, continue to provide cars to directors/employees at all, let alone fuel, when a cursory calculation shows that 75% or so are financially disadvantaged by so doing. But this does not mean don't use company cars, it means do the sums and then decide)

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By martinfoley07
04th Nov 2005 00:09

....hmmmm....beware..
greatly, those, like Simon, who seem to presume one type of solution is "KING". In my experience, this is very rarely the case. After all, if it were, it would be accepted by all.

I'm afraid there is no substitute for analysing the respective terms you can elicite from various sources on their respective merits. Boring, and hard work, but that is the price of getting the best deal, assuming that is what you want. Do NOT presuppose that HP, or lease, or cash, or any other terms are necessarily the best method of financing. In doing your calculations, ensure you encompass ALL economic return factors, including tax. It is impossible to to predict which will give the best result, let alone whivh "must" give the best result.

Stsrt from basic economic principles, not from marketng hype.

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By neileg
04th Nov 2005 09:43

Simon
I'm not naive, but anyone that believes that you can hand a vehicle back at the end of the contract without any further consideration certainly is. I have over £100k of evidence to back up my view.

You certainly do need to pick your companies carefully, and we do. We even write our own contracts and we ask for the assumed residuals in the calculations to make sure they are resonable.

However, if there's a big gap between the actual residual value of the vehicle and that assumed in the original deal, then the account manager has to do something to claw this back. Even the 'nicest' companies then hammer you on return conditions.

Contract hire has its place, and for cars that are well looked after and not driven into the ground it can be extremely attractive. For a panel van that gets treated like a skip, contract hire would be low on my list of funding options. It is a case of horses for courses.

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By neileg
03rd Nov 2005 13:50

Three problems with contract hire
1. Return conditions
2. Return conditions
3. Return conditions

You will discover that the question of what constitutes fair wear and tear on a commercial vehicle becomes a very expesive burden at the end of the contract.

Cash flow is important, and it is easier to borrow for a van than to borrow to fund dividends, which I think was what you were alluding to.

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By AnonymousUser
02nd Nov 2005 16:00

All the same ..
from tax perspective. Capital allowances available on van regardless of how it is acquired. As for dividends, I'm really not sure where you are going with this. Apart from additional interest on HP, the profit available for dividends will be unchanged whichever method you use.

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