Self Employed Car Lease Explained

6 minutes Published: 16/12/2019

What's Covered

With the prominent rise of the digital age, it’s no surprise that the route into self-employment, freelancing and ‘start-ups’ is becoming a more commonly trodden path.

In the first three months of 2019 (January to March), the number of self-employed workers increased by an astonishing 90,000 to reach a record high of 4.93 million. To put things into perspective, that’s nearly the equivalent of the whole population of Scotland (5.438 million).

It’s more than likely that one of you self-employed tycoons reading this article may be wondering what your car lease options are and whether you meet the requirements for a business car lease, rather than a personal lease. 

In this blog post, we’ll look at business car leasing for self-employed workers. We’ll also identify what requirements are needed to qualify for a business lease, what your different business lease options are, as well as, some of the benefits of business leasing for the self-employed.

Sole trader lease car

Self-Employment/Sole Trader

First things first, let’s make sure you’re eligible to class yourself as Self-Employed/ a Sole Trader.  

When you begin the adventure of being your own boss, you’re automatically classed as a sole trader whether you’ve informed the HMRC or not. 

An individual meets the criteria for self-employment if they:

  • Own a business and work for themselves.
  • Work for multiple clients.
  • Agree fixed prices for their work with employers or clients.
  • Provide the relevant and sufficient tools and equipment to finish a job.

Do I qualify for a Business Lease Deal?

As a sole trader, you’ll probably be wondering if you're eligible to lease a car through a business contract as opposed to a personal one.

Qualifying for a business lease deal requires you to fall under any of the following categories:

  • Sole Trader/Self-Employed
  • Partnership
  • VAT Registered Business
  • PLC
  • LLP (Limited Liability Partnership)
  • Limited Company 
  • Charity
  • Local Authority
  • Government/Embassy

So, if you're self-employed you have every right to pursue a business lease contract. You will however, have to go through a legal process which is similar to the one you would complete if you were applying as a private individual.

You may be required to provide the following legal documentation during the process:

  • Latest set of trading accounts.
  • Bank statements from the last 3 months.
  • Proof of ID and Address.
  • Credit Check.

Once you’ve been given the green light by the finance company, you’re good to go.

What business lease options are there?

You’ve got a few different options to choose from when applying for a business lease. 

Business Contract Hire

Business Contract Hire (BCH) is essentially the business-friendly version of Personal Contract Hire (PCH)

As one of the most popular forms of leasing, BCH involves paying a fixed monthly fee on the vehicle for the duration of your lease agreement. 

As the lessee, you’ll be responsible for keeping within your pre-arranged mileage allowance or you’ll risk incurring penalty charges for each mile you have gone over.

Finance Lease 

A Finance Lease works much like a BCH in terms of paying fixed monthly instalments for the duration of your lease deal, although there are no mileage or condition restrictions to worry about.

A finance lease cost is calculated using the overall cost of the vehicle, the length of your contract and the chosen end payment (balloon payment).

The balloon payment is chosen by the lessee and depends on how much you have agreed for your initial rental payment and monthly instalment fees to be.  

Once your lease deal finishes, you’ve got a couple of alternative options as to what you can do with the vehicle. You can:

  • Find a buyer for the vehicle who will pay off the remaining balloon payment. If you sell the vehicle for more than the balloon payment, you will receive the equity. If you don’t sell it for more, you’ll have to make up the remaining costs.
  • Pay a small fee (usually one monthly instalment) and keep the car for another year. You will, however, have to make the final balloon payment eventually.

Operating Lease

Business Operating Leasing also works in a very similar way to BCH. The only real difference is that Vehicle Excise Duty (Road Tax) is only included for the first year of the lease agreement.

Do I have to Pay Company Car Tax if I am Self-Employed?

You are exempt from paying Company Car Tax if you:

  • Are the proprietor (owner) of your own business.
  • Are a partner or a small partnership.
  • A member of a Limited Liability Partnership (LLP) 

This means that as a sole trader/self-employer, you don’t have to pay company car tax because there is technically no legal difference between you and your business. 

It’s important to bear in mind that if your business ever becomes a Limited Company then you’ll have to start paying company car tax.

What Expenses can I claim if I am Self-Employed?

Business expenses can rack up fast, so it’s crucial that you keep a record of all your motoring expenses that you have collected so you have proof to provide to the HMRC when you claim them back at the end of the year.

If you’re self-employed, you have two options to claim back tax deductible expenses on your business miles.

Actual Cost 

Calculating your actual motoring expenses is an accurate, yet tedious method of logging all your mileage over the year.

However, knowing what constitutes actual motoring expenses is paramount to keeping an organised record of all your expenses.

You can claim actual motoring expenses for:

  • Vehicle Insurance
  • Repairs and Servicing
  • MOT’s
  • Road Tax
  • Fuel
  • Parking
  • Hire Charges
  • Vehicle Licence Fees
  • Breakdown Cover

You cannot claim for:

  • Non-business driving or travel costs.
  • Penalty Fines.
  • Travel between home and work.

If you use your car for both business and personal purposes, you’ll need to calculate what percentage of mileage was used for business use before you claim your expenses back from the HMRC. This can be worked out by using the following calculation:

Business Miles ÷  Total Miles x 100 

Your tax-deductible expense can then be calculated by multiplying your business use percentage against your total motoring costs. 

Flat Rate

Claiming expenses using the flat rate for business mileage covers the whole cost of buying, running and maintaining the vehicle which makes you ineligible to claim capital allowance.

You’ll still need to keep a note of how many business miles you travel so you can provide the HMRC with your annual mileage.

The current flat rates for vehicles are:

Vehicle Flat rate per mile with simplified expenses
Cars and goods vehicles first 10,000 miles 45p
Cars and goods vehicles after 10,000 miles 25p

It’s important to realise that once you start using the flat rate for a vehicle, you can’t switch to the actual cost method.

Benefits of Business Leasing for the Self-Employed

  • VAT Offsetting - If your business is VAT registered then you can offset 50% of the leasing VAT on the car. If you have a van you can offset 100% of the VAT.
  • Fixed Monthly Payments - Leasing offers fixed monthly payments, which improves cash flow budgeting for business users.
  • No Depreciation Risks - A newly-bought car loses its value before you even get it home. By leasing a car the risk falls upon the vehicle funder.
  • Vehicle Excise Duty (VED) - Otherwise known as road tax, VED is usually included on all business lease deals.
  • New Vehicles - All lease cars are hot off the factory press. Leases tend to only last a few years, so you have the luxury of driving a new car and benefiting from modern, cutting edge technology.  
  • Full Warranty - Your lease vehicle will come with a full manufacturer’s warranty, and will normally cover the entire period of your lease.

Contact Us

If you require any further information or advice about business car leasing or self-employed car leasing, please don’t hesitate to contact us at LeaseFetcher