There are various ways to lease an EV, but here are the most popular, and how they differ.
Don’t want to buy your electric vehicles outright? Due to their higher up-front cost, most fleets lease their EVs to spread the cost over the lifetime of the vehicle. Contract hire, finance lease and salary sacrifice are three of the most popular methods. We look at what each approach offers.
Contract Hire
Benefits:
Simple to operate
Less upfront cost
Potential VAT reclaim*
Drawbacks:
Not as flexible
No residual value risk
Potential for end-of-contract charges
Contract hire is one of the most popular ways to finance an electric car or van. Leasing using a contract hire product is effectively like taking out a long-term rental so you don’t own the car or van at any point, which brings many benefits, but also some restrictions.
Usually, you pay a deposit up front of between three and nine months, based on the monthly rental, and then pay monthly after that, based on an agreed contract of duration (often three to four years) and mileage.
It’s a simple way to get an electric vehicle, and has a much lower up-front investment than buying it outright. Because you don’t own it, you simply hand the vehicle back at the end of the contract and don’t have the worry of what its used value might be when you de-fleet.
However, be careful not to exceed the agreed overall mileage or you are likely to be liable for excess mileage charges and while keeping the EV in good condition is important too, or you may face penalties for repairing damage. There are industry-agreed levels of fair wear and tear though.
Also, with EV technology developing quickly, bear in mind the length of contract you need. While monthly rentals are often cheaper the longer the deal you sign, if you feel you need to switch into newer models for benefits such as longer range, there can be early termination charges to pay if you want to get out of a contract before it is scheduled to end.
There are other benefits to contract hire. In some cases, it keeps the value of your EVs off your company’s balance sheet, and you can generally claim back some of the VAT of a rental where a vehicles usage qualifies for this.
Also, because of the low BIK rating of EVs, the National Insurance Charges companies have to pay on the car are commensurately low too.
Finance Lease
Benefits:
Flexibility
Potential for de-fleet profits
Drawbacks:
Higher monthly rentals
Residual value risk
Requires more fleet management
With finance lease, you share the potential risks and rewards of running electric vehicles over the time they are on your fleet. Generally, it is more flexible than contract hire, but there can be more risk involved.
At the start of the deal, you can decide the length of the agreement and mileage, and the monthly rentals, based on factors such as whether you pay a bigger deposit or want to include a balloon payment at the end.
Then, over the course of the lease, you pay the majority of the value to own the car or van, and at the end it is sold, and the profits of that sale are usually shared by you and the leasing company. If there is a balloon payment to be paid, that must be honoured in full, whether the sale covers the cost, or not.
Alternatively, having paid off most of its value, you can extend the contract for a secondary rental period which is usually far lower than a monthly rental extension with contract hire.
Where finance lease can be useful with EVs is that it offers a degree of flexibility in terms of either running the vehicle longer (useful if supply is an issue) or being able to de-fleet earlier if the used value is healthy (handy if you want to upgrade to new models or the used market for EVs is booming).
Some fleets like this ability to adapt and flex their vehicles’ operating window, and benefit from resale values, but it requires proactive fleet management and these cars and vans will be on your balance sheet for the duration of the lease. For others, being on balance sheet and subject to residual value risks make finance lease a less attractive option.
Salary Sacrifice
Benefits:
Saves NIC and Income Tax
A benefit for non-company car drivers
Drawbacks:
Doesn’t work for all drivers
Employer needs to manage the scheme
Salary sacrifice schemes for EVs are increasing in popularity for drivers who do not qualify for company cars, because the low Benefit-in-Kind on electric cars often makes it very tax efficient.
It works like this:
The employer sets up the leases for the car, often with maintenance and insurance packaged in, for its employee.
The employee then sacrifices part of their salary before tax to pay for the lease. This means employers can save on National Insurance Contributions (NIC), while employees save on National Insurance and Income Tax that they would otherwise have paid before they purchased or leased their own private car.
They pay BIK on the car, but because the rates for electric vehicles are low it is often still the most cost-effective approach.
There are some issues to consider though. Employers have to manage the scheme carefully to ensure employees qualify financially, and because the car is not the employees, if they leave then you need to manage its de-fleeting.
Often salary sacrifice providers will offer insurance to cover this though. And you are still the lessor of the car, so will be charged for any excess mileage or damage.
There are a number of specialist salary sacrifice providers out there who can set up schemes, but before you do, it is important to have completed a full financial analysis of whether it is suitable for your business, and your employees.
In Conclusion
Ultimately, how you fund electric vehicles is dependent on how your business is set up financially, and how you view funding and risk. For some, it might be that buying outright is the right approach instead. But the methods above are a good starting point, giving you options and flexibility as you move to an electrified fleet.
*on qualifying vehicles and usage.
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