Vehicle Finance Methods
The choice of finance methods is dependent upon many things; Cash flow, Balance Sheet, Company Tax and Operational requirements such as contracts.
There are many finance methods; Cash, Instalment Sale, Bank lease (with or without residual value), Full maintenance lease, operating lease (excl maintenance) and short term rentals. Each has specific cash flow, balance sheet and tax implications.
In all instances the VAT on the purchase price is only claimable only if the asset is a commercial vehicle. Where maintenance or services are provided the VAT is claimable.
With the introduction of the new accounting standard IFRS 16 (January 2019), all leased vehicles (bank, FML & operating leases) are to appear on your balance sheet, if the period of rental is 12 months or more.
Finance methods;
Cash Purchase - a single cash payment made in full for the purchase of the vehicle. It is recorded on the balance sheet as an asset and SARS allows an annual depreciation claim. Importantly, when analysing the cost of this finance method the cost of borrowing or opportunity cost needs consideration.
Bank Lease (no residual value) – the asset purchase is funded by the bank and repayments are made over an agreed period. The bank may require a deposit and in this case the asset will be paid in full. The repayments are claimable as a business expense but the net profit recovery upon sale is considered to be income on sale of an asset.
Bank Lease (Residual Value) - the asset purchase is funded by the bank and repayments are made over an agreed period. The bank may require a deposit. The use of a Residual value has the benefit of reducing the monthly rental. Payment of the residual value is considered to be part of the rental stream and is at lessee risk. The repayments are claimable as a business expense but the net recovery upon sale is considered to be income on sale of an asset.
Full Maintenance Lease (FML) - this is a residual value lease which includes the cost of maintenance and tyres (optional). The FML rental is based on a fixed time and Kms allowance. The lessor carries the risk of the resale value and maintenance, and requires the return of the vehicle upon termination. This imposes strict condition requirements upon the customer. Failure to meet these requirements exposes the customer to make good costs and excess Kms charges. This service has appeal to customers who require fixed operating costs or have fixed term contracts which require the provision of vehicles. VAT is also claimable on the maintenance and services portion of the FML rental
Operating Lease – the same rental structure as an FML but specifically excludes maintenance, which is at the customer’s cost and risk. It carries the same operating requirements and commercial risks as an FML.
Short Term Rentals – These are best utilised where the required period is less than 12 months. Although the leasing companies are able to provide this facility it is generally provided by the Car Rental companies.
Each finance method has different cash flow, tax and balance sheet implications. The best method to identify the least cost or most beneficial method is to use a Discounted Cash Flow model.
Have a question?
Contact Nigel Webb - Latitude Fleet Services - nigelw@latitudefleet.co.za