Business vs personal car leasing: the differences

BCH and PCH: the core difference

Both are forms of contract hire. The funder owns the car, you pay a monthly rental for an agreed term and mileage, and at the end the car is often handed back, though end-of-term options vary by funder. The difference is who signs the agreement and what that means for tax and regulation.

PCH is for private individuals using the car for personal motoring. BCH is for businesses: limited companies, partnerships, LLPs and sole traders leasing for business use. Some funders show BCH quotes excluding VAT, while PCH rentals are shown including VAT because a private individual cannot reclaim it.

The car, term lengths and mileage options can be identical. For a broader look at how the product works, see how car leasing works.

Who qualifies for business leasing

Limited companies, LLPs and partnerships are the clearest BCH customers. The funder will usually run a credit assessment on the business, and may ask for accounts, a personal guarantee from a director, or both. For how assessments work in general, see how credit checks work when you lease a car.

Sole traders can usually lease on a business basis, but they are legally the same person as the business. Funders may therefore assess them like an individual and, depending on the agreement, treat the hire as a consumer hire agreement. The funder's paperwork is the place to confirm which applies.

Which legal regime applies

Contract hire is a hire agreement, not a loan, so it is not a credit agreement in the way PCP or hire purchase is. The regime that can apply to it is regulated consumer hire under the Consumer Credit Act 1974, with firms authorised and supervised by the FCA. Do not apply the rules for PCP or hire purchase to contract hire, or the reverse.

Regulated consumer hire covers hirers who are individuals, where the agreement is capable of lasting more than three months. For this purpose an individual can include a sole trader and some small partnerships of two or three partners. There are exemptions, including for some hire entered into for business purposes, so a sole trader should not assume protection applies without checking.

A limited company or LLP is not an individual under these rules, so hire to one generally falls outside the regime. Do not assume a PCH protection applies to a BCH agreement. If you are unsure, ask the funder to state in writing whether the agreement is regulated.

VAT on lease rentals

VAT is where business leasing differs most. A VAT-registered business can reclaim input VAT on lease rentals, but HMRC restricts it for cars. Where the car is available for any private use, including ordinary commuting, only 50% of the VAT on the rental can be reclaimed.

If the car is genuinely not available for private use, the full VAT may be reclaimable. HMRC's test is strict. Examples it has recognised include taxis and driving school cars, and a pool car may qualify if it is kept at business premises and not used for commuting. Having a company car policy is not enough on its own.

A business that is not VAT-registered cannot reclaim anything. For a sole trader this means the full VAT-inclusive rental is the cost, before considering income tax.

Other parts of the lease can be treated differently. Whether VAT on an included maintenance element is treated differently from the VAT on the car hire depends on how the contract and invoices are structured and on HMRC's rules. Do not assume the 50% restriction either does or does not apply to it. VAT on fuel follows its own rules too, so check HMRC's VAT guidance on motoring expenses on gov.uk, or ask your accountant.

• Available for private use, including commuting: 50% of rental VAT can be reclaimed.
• No private use at all, and evidence to show it: full reclaim may be possible.
• Not VAT-registered: no VAT reclaim.

Worked example: the VAT effect

This is illustrative only. Assume a rental of £300 a month excluding VAT, VAT at the standard 20%, no initial rental, a 12-month period, and a car available for private use in a VAT-registered business. Nothing else is included, such as maintenance or fuel.

VAT on each rental is £60, so each invoice is £360. The business reclaims 50% of £60, which is £30, leaving £30 of VAT it cannot recover. Over 12 months that is £360 of VAT reclaimed (12 x £30).

Total A is the VAT-inclusive rental paid by a private individual, with no VAT reclaim: £4,320 (12 x £360). Total B is the business's net cost: the £3,600 net rental (12 x £300) plus £360 of irrecoverable VAT (12 x £30), which is £3,960.

The difference between the two totals is £360 (£4,320 minus £3,960), which equals the VAT reclaimed. This is before any corporation tax or income tax relief, which depends on the business.

Tax relief: sole traders and limited companies

For a limited company, lease rentals are generally a business expense deducted when working out profits. However, HMRC rules can disallow a proportion of the rental on cars above a certain CO2 emissions level. The threshold and percentage are set by HMRC and can change, so check the current rule on gov.uk. Zero-emission cars have been treated more favourably under the structure in place in recent years, so confirm the position at the time you lease.

If a director or employee can use the car privately, it is generally a taxable benefit in kind. The individual pays income tax on it, and the company pays Class 1A National Insurance. The amount depends on the car's list price, CO2 emissions and fuel type, and HMRC sets the rates each tax year. See benefit in kind company car tax, explained for how the calculation works.

A sole trader has no benefit in kind on their own car. Instead, they claim only the business proportion of the lease costs, so private mileage has to be separated out. A mileage log is essential, recording the date, journey purpose and distance of each trip, so that business miles can be set against total miles. Simplified mileage rates are designed for cars you own, so check with HMRC before mixing methods.

Employees who want a car through their employer may also come across salary sacrifice car schemes, which are a separate arrangement with their own tax effects.

Accounting treatment basics

How a lease appears in the accounts depends on the size of the business and the framework it uses. Historically, many contract hire agreements were treated as operating leases, with the rentals expensed over the term. Businesses using IFRS typically record leases on the balance sheet.

Amendments to UK accounting standard FRS 102 are intended to bring smaller companies closer to similar on-balance-sheet treatment. The Financial Reporting Council sets the effective date, and whether it applies depends on your accounting period, so your accountant should confirm what applies to you.

Sole traders and very small businesses using cash basis accounting often just record rentals as they are paid, with a private use adjustment. Your accountant can say which method suits your situation.

Keep the lease agreement, VAT invoices and mileage records. Whichever treatment applies, these are the evidence behind your VAT return and tax computation.

Contract terms that matter on both routes

Many core terms can be similar for BCH and PCH, but check each agreement. The hirer is generally responsible for the rentals, insurance, servicing arrangements and condition of the car. Excess mileage and damage charges can apply on return, and the guides on excess mileage charges and fair wear and tear explain how they work.

End-of-term options vary by funder. Under contract hire the funder owns the car throughout, so ownership does not transfer when the term ends. Some funders may offer to sell the car to the hirer, in which case ownership passes only when that sale is completed and paid for, and returning the car is another option. See what happens at the end of a car lease.

Ending early can be costly. How the settlement is calculated varies by provider, and may take account of remaining rentals, the car's value and any charges. If the funder's recovery from the car does not cover what is owed, the hirer remains liable for the shortfall, and that liability continues after the car has been returned until the balance is settled. See can you end a car lease early.

For fines tied to the car, the registered keeper is legally liable first, and on a leased car that is often the funder. Separately, the agreement may allow the funder to pass the fine on to the hirer and add an admin charge. Some agreements let the funder charge the hirer for incidents during the hire period even after the contract has ended, so check the terms.