CONFUSED by all the technical terms and jargon that go hand in hand with car leasing and company cars? Don’t be put off.
Here’s our A-Z run down of the most commonly used car leasing and company car terms with simple explanations of everything from secondary rentals to P11D values.
When a third party – normally a lease company – handles the aftermath of an accident on your behalf. This typically includes: providing onward transport for your employee in the first instance and then a replacement car while repairs are carried out; arranging for estimates at an approved repairer; overseeing the repairs; liaising with insurance companies and handling written correspondence between involved parties; and, usually, helping to recover uninsured losses.
How long the deal lasts, usually expressed in months – eg three years is shown as 36 months.
This stands for Annual Percentage Rate and is the simplest, safest way to compare finance deals. The APR is the total cost of credit, including interest and all additional charges. This is different from the – flat rate – which includes just the interest. The lower the APR, the cheaper the loan.
A large one-off payment made at the end of some finance agreements, such as contract purchase. Also known as ‘lump sum’ or ‘final amount to pay’.
Set by the Bank of England each month. Lenders use it to calculate interest rates on loans. When the base rate changes, loan interest rates usually change accordingly.
Benefit in kind (BIK) – also known as company car tax
This is the tax you pay when your employer provides you with a car for both business and private use. Colloquially, it’s known as company car tax. The exact amount of benefit in kind tax levied on a car is determined by its list price for tax purposes (including any extras fitted) and its carbon dioxide (CO2) emissions. Generally, the lower the emissions and cheaper the car, the less tax you pay, although there are discounts for ultra low emission cars and a3% surcharge for diesels. Company cars aren’t the only type of taxable benefit in kind. Private medical insurance is another example, for instance, although not all benefits in kind are taxable, such as personal use of an employer-provided mobile phone or computer.
When you change the duration of a rental period, or the mileage limit, it’s called a contract amendment.
Contract hire – car leasing
When you rent a vehicle for a set time and mileage, and pay monthly. Service and maintenance costs can be included within the monthly rental fee if required. A common contract hire period for a car is 36 months/60,000 miles for higher mileage drivers (ie an average of 20,000 miles each year) or 36 months/30,000 miles for lower mileage drivers (10,000-mile yearly average). The vehicle belongs to the contract hire company throughout the agreement, and at the end of the contract, you hand the vehicle back. Provided it is in good condition and within the mileage limit, you have nothing extra to pay. You can offset payments against corporation tax (or your income tax) liability. Normally, 50% of the VAT rental can be reclaimed for a business car lease, and 100% of the VAT on the maintenance element of an agreement can be reclaimed.
There are two types of contract hire: business contract hire (ex VAT) and personal contract hire (where the rental includes the VAT element).
Contract purchase/Personal contract purchase (PCP)
A way to run a vehicle with fixed monthly repayments and an initial deposit. If, at the end of the deal, you decide you want to own the vehicle, you make a large one-off payment to keep it. Alternatively, you can just hand the car back to the contract purchase company and avoid the one-off payment, or trade it in for another car and another contract purchase deal with the same lender. With a PCP, if the car’s value is greater than the large one-off payment when you trade it in, you can put the surplus towards your next car. With business contract purchase, if you hand the car back and the contract purchase company sells it for more than the large one-off payment, you may get a percentage of the profit – it depends on the contract purchase company’s policy. Monthly repayments are typically lower than for hire purchase but the total amount repayable is often higher if you decide to make the final big payment to own the car. Contract purchase is often used for more expensive vehicles on a fleet. It also offers the tax advantages of claiming capital allowances throughout the contract and can be a good option for companies that are limited in the amount of VAT they can reclaim.
Daily rental is also known as ‘short-term hire’. It’s highly flexible. You can hire a vehicle for a day, a week or more. It can also be used for three to six month periods. You pay a set rate for using it and hand it back to the rental company when you’re finished. Daily rental can be a good way to plug gaps in your company’s transport demands at short notice, or when you need a more specialist vehicle for a specific job, such as a refrigerated van or an MPV. It can also be a cost-effective way to bridge a longer (ie three- to six-month) but temporary gap in your fleet, or for staff during a probation period. Some companies use daily rental rather than asking an employee to use their private car as part of a wider health and safety policy.
When a vehicle reaches the end of its contract and is no longer on hire.
Also known as ‘of contract charges’ and ‘dilapidation’. It’s when the leasing company has to carry out repairs to a vehicle at the end of its contract to make it saleable. Allowances are made for fair wear and tear, but lease companies charge for excessive wear, abuse and neglect. De-hire charges can vary significantly between different lease companies. Make sure you understand what condition you are expected to return the car in, and what the charges are if you don’t.
The amount of value a vehicle loses as it ages. Many factors influence how quickly or slowly a vehicle depreciates, but generally prestige brands (eg Audi and Mercedes) hold their value better than mass-market brands (eg Ford and Vauxhall). Also, diesel cars normally depreciate slightly slower than the equivalent petrol models.
Also known as ‘end of contract charges’ and ‘dehire damage charges’. It’s when the lease company has to carry out repairs to a vehicle at the end of its contract to make it saleable. Allowances are made for fair wear and tear, but lease companies charge for excessive wear, abuse and neglect. Dilapidation rates can vary significantly between different leasing companies. Make sure you understand what condition you are expected to return the car in, and what the charges are if you don’t.
When you cancel a deal before it is due to end. Early termination can result in a penalty charge. With contract hire, for instance, the penalty charge for early termination is often 50% of all the rental fees yet to be invoiced.
EVs (electric vehicles)
An EV, or electric vehicle, runs on a battery that can be recharged from the mains electricity.
End of contract charges
Also known as ‘dilapidation’ and ‘dehire damage charges’. It’s when the lease company has to carry out repairs to a vehicle at the end of its contract to make it saleable. Allowances are made for fair wear and tear, but lease companies charge for excessive wear, abuse and neglect. End of contract charges can vary significantly between different leasing companies. Make sure you understand what condition you are expected to return the car in, and what the charges are if you don’t.
When a leased vehicle goes over the agreed mileage limit. In such circumstances, the lease company will charge you for the excess mileage. Payments for substantial excess mileage can be costly. So if you think your mileage will substantially exceed your lease agreement, talk to your lease company about rescheduling the lease over a higher mileage.
A formal agreement to extend the duration of a deal.
You pay a monthly fee for an agreed period, as with contract hire. However, there’s a crucial difference with finance lease. At the end of a contract hire deal, you hand the car back to the lease company, but at the end of a finance lease deal, it is up to you to sell the car to a third party. Whatever you get for it is yours to keep, apart from a small cut (typically 5%) taken by the lease company. As a result, monthly rentals are higher for finance lease than for contract purchase. Finance lease means you’re taking a gamble on how much the car will be worth at the end of the deal – if secondhand prices fall, you’ll lose out, but if they rise, you’ll benefit. Finance lease tends to be used for more prestigious cars that are more likely to hold their value well. You can normally reclaim 50% of VAT on the finance element of the deal and the vehicle is shown on the balance sheet as an asset.
A large one-off payment made at the end of some finance agreements, such as contract purchase. Also known as a ‘balloon payment’ or ‘lump sum’.
First Registration Fee (FRF)
When a vehicle is registered for the first time, a £55 fee is payable to the DVLA to cover the cost of registering the vehicle throughout its life.
This is the total cost of interest on a loan, calculated as a percentage. It differs from the APR because it does not include any other charges for credit made by the lender. As a very rough guide, the flat rate is approximately half of the APR. It’s always wise to use the APR to compare loans, rather than the flat rate, because it gives a truer picture of the real cost of the loan.
When an outside party – normally a lease company – looks after all the day-to-day running of your fleet. It tends to be preferred by larger fleets, where the economies of scale make it financially viable to outsource all fleet administration and operational decisions. For smaller fleets, though, where the fleet operation is less complex, it’s harder to justify the cost of fleet management.
GAP stands for Guaranteed Asset Protection. If a vehicle is stolen or written off, the insurer will pay out its market value. However, if you were paying for the vehicle using a finance deal, the insurance payout may not cover the amount you owe the finance company. GAP pays out the difference.
Grey Fleet is industry short-hand for drivers who use their own private cars on business. In particular, larger companies with many drivers using private cars for business instead of company cars – rather than a business owner choosing to use their private car for business with AMAP reimbursement.
A way of buying a vehicle on credit. The loan is secured against the vehicle. You make a monthly repayment for an agreed period – 36 months is common – and after that the vehicle is legally yours, subject to an option to buy (usually for a small sum). You are often required to make an initial deposit. Until the final payment, the vehicle belongs to the hire purchase company, but you act as its owner for all practical purposes. The vehicle should be included as an asset on balance sheets.
A hybrid is car that uses a combination of a petrol or diesel combustion engine with an electric battery. A ‘parallel’ hybrid has both engine and battery connected all the time (eg Honda Insight) In this combination the battery assists the engine, such as in acceleration. The advantage is the battery’s lighter weight. A ‘series’ hybrid can run on either battery power or a combination of both power sources. However, it tends to need a heavier battery, which reduces the effictiveness of its emission reduction. A series/parallel combines the benefits of both types of hybrid drivetrain (eg Toyota Prius). The two main types are more commonly separated by the term ‘mild hybrid’ (Honda’s system) and ‘full hybrid’ (Toyota’s system).
Sometimes called ‘IP’. This is a one-off payment you make before the vehicle is delivered. With contract hire, for instance, the initial payment is typically equivalent to three months’ rental fee.
A large one-off payment, typically made at the end of some finance agreements, such as contract purchase. Also known as ‘balloon payment’ or ‘final amount to pay’.
When you pay a monthly fee to a lease company to cover all servicing and routine maintenance costs. It is a common option for contract hire vehicles and the fee is normally included in a single monthly rental cost. Such agreements are often known as ‘contract hire with maintenance’. When the contract hire deal ends, so does the maintenance agreement. A maintenance contract allows you to budget more easily and some companies choose this option as part of a wider health and safety policy. Normally, 100% of the VAT on the maintenance element of a contract can be reclaimed.
Minimum guaranteed future value (MGFV)
When you take out a business or personal contract purchase (PCP) deal, the lease company guarantees the lowest amount the car will be worth at the end of the deal. This is called its minimum guaranteed future value (MGFV). If you want to own the car at the end of the deal, this is also the amount you’ll have to pay. Alternatively, if the car turns out to be worth more than the MGFV at the end of the deal, you can put the surplus towards another PCP with the same company. With business contract purchase, if you hand the car back and the lease company sells it for more than the MGFV, you may get a percentage of the profit – it depends on the lease company’s policy.
This is a company car’s list price for tax purposes. It includes the cost of the car, any extras fitted to it and delivery, but excludes Vehicle Excise Duty (VED) and First Registration Fee.
This form is completed by an employer and details any taxable benefits in kind an employee has received in that tax year. These would include a company-provided car, interest free loan and private medical insurance. The employer must declare such benefits in kind for each employee who earns more than £8,500.
Useful for larger fleets, it’s a way of calculating excess mileage for a number of vehicles on the same fleet. It’s typically used when some are over their agreed mileage limit and others under it.
When a car is out of action, it may be replaced on a temporary basis by another car. This is known as a relief car, or sometimes a courtesy car. Relief cars are often arranged by the lease company if you have a maintenance contract – they may be supplied by the lease company, the dealer who is doing the work on your original car or, occasionally, a manufacturer. Insurance companies also provide relief cars in certain circumstances.
How much a car is worth at a given age and mileage. All cars suffer from depreciation – that is, they lose value over time – and the residual value is how much of their original value remains. It is usually referred to as a percentage. So if a car costs £20,000 when it is new and is worth £10,000 after three years, its residual value after three years is 50%. A forecast of a car’s residual value provides a clear idea of how good or bad an investment it will be – the lower its residual value, the worse the investment.
Sale and leaseback
It’s when you sell one or more vehicles to a lease company and it leases them back to you. Sale and leaseback transfers the asset risk (such as a fall in secondhand values) to the lease company, releases capital that you can invest elsewhere in the business and frees up lines of credit.
A term used in finance leasing. If you decide to keep a vehicle after the original finance lease deal has finished, you arrange a new deal. This is known as secondary rental or, sometimes, ‘peppercorn rental’. The monthly rental fee is dramatically lower than it was with the original deal – the exact amount varies between leasing companies. So if you think you might need a secondary rental, ask your lease company for a quote.
Short-term hire is also known as ‘daily rental’. It’s highly flexible. You can hire a vehicle for a day, a week or more. It can also be used for three to six month periods. You pay a set rate for using it and hand it back to the rental company when you’re finished. Daily rental can be a good way to plug gaps in your company’s transport demands at short notice, or when you need a more specialist vehicle for a specific job, such as a refrigerated van or an MPV. It can also be a cost-effective way to bridge a longer (ie three- to six-month) but temporary gap in your fleet, or for staff during a probation period. Some companies use daily rental rather than asking an employee to use their private car as part of a wider health and safety policy.
V5 registration document/logbook
The V5 is the vehicle’s registration document and is often called the logbook. It contains the essential details of the car (engine size, colour, chassis number etc) and the name and address of its registered keeper. If any details of the car change (colour, for instance, or new engine), the registered keeper must notify the DVLA (Driver and Vehicle Licensing Agency). Likewise if the vehicle is sold. When driving in mainland Europe, you are legally required to carry the vehicle’s V5 with you.
Vehicle Excise Duty (VED)
The official term for road tax or road licence fund (RFL) or tax disc. New cars are supplied with 12 months’ VED. It is your responsibility to ensure you keep your car’s VED up to date – you can buy either six or 12 months’ VED. If you have a car on contract hire, the lease company normally handles this and renews your car tax.
Vehicle downtime (vehicle off road)
When the vehicle is off the road (VOR) and not able to work for you, such as when it is being serviced or repaired.
Writing Down Allowance. The rate at which capital allowances can be claimed for business-owned assets such as company cars.
Do You Have A Vehicle Leasing Question?