Company vehicle: leasing or buying with finance?

Key takeaways

• Leasing is a long-term rental agreement. The leasing company remains the legal owner of the vehicle throughout the contract, and you return it at the end of the lease.
• Operational leasing includes many of the costs and services associated with using your vehicle, such as taxes, maintenance, roadside assistance, tyres, repairs and insurance. The vehicle is returned at the end of the contract, although you may sometimes have the option to buy it at its market value.
• Financial leasing is a lease without additional services, but with a contractually agreed purchase option that allows you to buy the vehicle at the end of the lease. The accounting treatment depends on the value of that purchase option.
• Buying a vehicle outright, either using your own funds or with finance, means you become its legal owner immediately. Buying with your own funds requires sufficient available capital.

Choosing a company vehicle, and how to finance it

Car, van or light commercial vehicle… When you need a new business vehicle, you not only have to choose the type of vehicle, make and model, but also decide how you want to finance it.

Whether you’re a sole trader or run your business through a company, you generally have two main options: buying the vehicle or leasing it. Each financing solution has its own characteristics: buying outright using your own funds or vehicle finance, financial leasing or operational leasing.

Leasing a company vehicle: with or without services?

Leasing is a form of long-term rental. You enter into an agreement with a leasing company, which purchases the vehicle. The leasing company therefore remains the legal owner of the vehicle, not you or your business.

The vehicle is made available to you for a fixed period, usually between two and five years. The lease payments are determined by several factors, including the length of the contract and, in the case of operational leasing, the agreed annual mileage.

Leasing is also available for a recent used vehicle, although in some cases the maximum contract term depends on the vehicle’s age and its expected economic life.

Operational leasing: an all-inclusive rental solution

With operational leasing, the fixed monthly payment that you or your business pays to the leasing company also covers a range of vehicle-related costs and services, so you don’t have to manage them separately. These typically include:

• Third-party liability and comprehensive insurance (sometimes as optional cover)
• Registration tax, payable when the vehicle is first registered, and the annual road tax
• Maintenance and repairs for your company vehicle
• Roadside assistance
• A replacement vehicle in the event of a breakdown
• Tyres

What happens at the end of the contract?

Unlike financial leasing, an operational leasing contract does not include a pre-agreed purchase option allowing you to buy your company vehicle at the end of the lease. You will therefore need to return the vehicle to the leasing company when the contract expires.

Some leasing companies do, however, allow you to buy the vehicle at the end of the contract at its market value at that time, or even extend the lease.

When you return the vehicle, its condition will be assessed and compared with its condition at the start of the lease. If damage beyond normal wear and tear is identified, you may be required to pay compensation. Renta, the Belgian federation of vehicle leasing companies, has established guidelines that can be used to assess such damage.

Accounting treatment of operational leasing

The monthly lease payments for an operational lease are treated as operating expenses and recorded as business expenses, rather than as an asset on your balance sheet.

VAT payments

VAT is included in the monthly lease payment. This means you do not have to make a substantial upfront VAT payment at the start of the contract, as you would if you or your business purchased the vehicle outright.

Financial leasing: renting your professional company vehicle with a purchase option

Financial leasing of a business vehicle is also a long-term rental solution. The leasing company buys the vehicle and remains its legal owner, while making it available to you in return for a monthly lease payment.

However, there are two important differences compared with operational leasing:

• The monthly lease payment does not include services such as insurance, road taxes, maintenance or repairs.
• The financial leasing contract includes a purchase option at a pre-agreed price, making it easy to keep the vehicle at the end of the contract. You decide the amount of the purchase option, which will affect your monthly lease payment. You can also choose to pay a higher initial rental payment.

Accounting treatment: financial leasing or financial renting?

The purchase option included in the contract is one of the key features of financial leasing. Depending on the value of that purchase option, the accounting treatment differs:

• Is the pre-agreed purchase option no more than 15% of the vehicle’s purchase price? In that case, the financial lease is treated as an investment rather than an expense. The vehicle is recorded as a depreciable asset (typically over five years for a car). Only the interest included in the monthly lease payment is treated as a business expense.
• Is the purchase option more than 15% of the vehicle’s purchase price? In that case, the agreement is generally referred to as financial renting. The monthly lease payments are treated as business expenses rather than being recorded as an asset.

VAT payments

As with operational leasing, VAT is included in your monthly lease payment. This means you don’t have to pre-finance a significant VAT amount.

Buying a company car or commercial vehicle: own funds or a loan?

When you buy a business vehicle, you become its legal owner. This gives you complete control over the vehicle, including how many kilometres you drive and when or if you decide to sell it.

However, buying a vehicle outright means using your own funds to finance a significant investment. If you prefer to spread the cost over time, a business vehicle loan may be a better option.

Instalment loan for a company car or commercial vehicle

An instalment loan lets you buy a company car or commercial vehicle while preserving your cash flow. You will, of course, pay interest on the amount you borrow, but that interest is tax deductible.

You can also choose to finance part of the purchase using your own funds and the remainder with an instalment loan.

The loan term typically ranges from 2 to 5 years. In principle, the maximum term reflects the vehicle’s expected economic life, which may affect the loan term available if you are buying a second-hand vehicle.

Accounting treatment when buying a company car or commercial vehicle

Buying a vehicle is treated as an investment. From an accounting perspective, it is therefore recorded as an asset and depreciated over its useful life (typically five years for a car).

If you finance the purchase with an instalment loan, only the capital value of the vehicle is recorded as an asset. The interest paid on the loan is treated as a business expense.

VAT payments

Contrairement à un crédit voiture pour particulier, le montant emprunté via un crédit professionnel n'inclut généralement pas la TVA, que vous devrez donc préfinancer dans sa totalité.

Which financing option is best for your business?

The right choice depends on your business, your financial and accounting situation, your objectives and your priorities.

Do you want to own the vehicle at the end of the agreement? Would you prefer an all-in leasing solution with a fixed monthly payment covering all the main costs and services? Or would you rather choose and manage those services yourself?

Ultimately, the decision is yours. However, if you’re comparing different financing options, make sure you look at the total cost of your vehicle. Consider not only the purchase or lease costs, but also insurance, maintenance, repairs, taxes, the tax treatment and the vehicle’s resale value.

Our advice: speak to your accountant or tax adviser before making your decision. They can help you choose the financing option that best suits your business, taking into account factors such as your company’s solvency, available cash flow and financial objectives.