The company car remains a vital business tool and one of the top employee perks.

Business motorists have had a hard time of it in recent months, hit by rising fuel prices, congested roads and retrospective tax increases. Despite this tough environment, the company car remains a vital business tool and one of the top employee perks.

But if using a car for work purposes is a no-brainer for many organisations, how you pay for it does require a lot more thought. When it comes to acquiring a company vehicle, there are two main options. The first is to purchase it outright, using cash or a loan.

However, it is not just the ticket price of the car you need to worry about. The continuing rise in new vehicle prices, combined with a sharp fall in used prices (known in the trade as ‘residual values’) has resulted in a steep depreciation of this particular company asset.

Then there is the cost of regular maintenance and any other unforeseen repairs to factor in. Finally, there is the issue of working capital. Do you really want to have your cash tied-up in a depreciating asset when it could be better invested growing your business?

More and more companies are choosing to acquire vehicles through some form of funding agreement rather than buying them upfront. They have a choice of either purchasing or leasing them.

Both forms of funding usually involve paying a regular amount over a contracted period, typically three years or 60,000 miles in the case of company cars.

Purchase-based funding methods include hire purchase and contract purchase. Lease-based methods include contract hire and finance lease.

Before opting for a funding method, an organisation needs to consider the overall cost of each approach, the flexibility it provides, how it will affect the balance sheet and what the potential tax implications are.

Contract Hire

Contract hire is the most popular way of hiring a business vehicle – more than half of all new company cars registered each year are funded this way.

A vehicle is leased to an organisation for a set time and specified mileage, in return for an initial fee (usually three months rental) and a subsequent monthly charge. At the end of the contractual period, it is returned to the leasing company.

This type of hire removes many of the risks of vehicle ownership, including depreciation, servicing costs and eventual sale. The hirer benefits from the leasing company’s greater buying power and knowledge of the used car market.

However, they could also miss out on any potential benefits of car ownership, for example, lower than anticipated maintenance costs or an unexpected upturn in the residual value of a particular vehicle.

Because it is owned by the leasing company, a contract hire vehicle does not have to be shown as an asset on your balance sheet. Some or all of the rental charge can be offset against taxable profits.

Finance Lease

With a finance lease you choose to pay either the entire cost of the vehicle, including interest charges, over an agreed lease period or opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle.

The user benefits with a fixed cost but does take on the administration and operating risks, for example unexpected maintenance, repairs and losses in residual value. At the conclusion of the contract you can continue to operate the vehicle for a nominal fee, but you will at no time take ownership of the asset.

Ownership of the vehicle remains with the leasing company for the duration of the contract, but the car does appear on your balance sheet with the capital element of the outstanding rentals representing a liability.

Some or all of the rental charge can be offset against taxable profits.