Business Contract Purchase on Electric Cars

Electric cars and business contract purchase

The growing confidence in lithium-ion technology is only encouraging more and more business customers to turn their fleet towards EV and away from petrol and diesel solutions. And as the SMMT statistics for September show the demand for BEV is increasing, with 45,323 vehicles registered in Sep 2023, with fleet and business accounting for much of this.

This represents an 18.9% increase in electric car registrations compared to last year. Large fleets are driving much of this via their company car and salary sacrifice schemes which offer unbelievable tax benefits to the end user (and employer), not to mention a positive vehicle experience.

But the methods in how electric cars are being procured by companies does need to have some analysis; in particular noting that there is not just one finance method. With growing confidence in the cars, batteries and charging infrastructure, businesses are not just looking at usership methods, like contract hire and subscription, with many actually looking into more purchase style agreements. The one in focus for this blog is Business Contract Purchase or BCP as it is abbreviated to.

What is Business Contract Purchase - is this just PCP for a business?

Described as an economical way to buy a car, the concept of a BCP does need some investigation. In many ways, it is not unlike a PCP in that a business will be provided with a monthly payment for their electric vehicle together with a pre-agreed final payment (or balloon). The way in which a BCP is calculated by e-car will depend on factors such as:

•  The Car - every EV will have a have a different price (and no, they are not all expensive). The car you need should be suitable for you in terms of aesthetics, ergonomics but also its key EV facets. These will be elements like range, charging speeds / time, efficiency and towing capacity. And the rule of thumb is that the more expensive the car, the more expensive the monthly price (especially if you are adding additional options to the vehicle)! Our team may point you and the business towards certain special offers, as we often receive higher discounts.
•  The Annual Mileage - your annual mileage will not only influence the car you select (thinking range here) but it also influences the monthly price. With a BCP, because there is an end payment (balloon) what you will find is that the higher the mileage you cover, the higher the monthly rental will be. However, your balloon will decrease in a corresponding fashion. We do also suggest you provide an accurate mileage estimation for any quote requirements - this could be between 5,000 to 30,000 miles per annum;
• The Term - while there is some degree of flexibility, most of our contracts will vary between 2 years and 5 years, with anything in-between. Again, the normal rule of thumb is that the longer the term, the cheaper the monthly payment and balloon will be on a contract purchase. But, you need to ensure the term is suitable; don’t just choose it because the payment feels affordable. With contract term think about your personal circumstances, the warranty period and your propensity to end the contract. While you may seek early termination, this may not be a cost-neutral exercise; and
•  The Initial Payment OR Deposit - the amount you pay in month 1, which we call an initial payment, is centred around your business cash-flow. While there is a degree of flexibility, in some cases a finance company will suggest a minimum deposit as part of their lending and credit criteria. In addition, you need to think about your cash-flow, as a big deposit may allow for “cheaper” monthly payments but you have to question if that money could be used better elsewhere? 

What are the Pros of a BCP?

For an unregulated VAT registered business, this offers an incredible tax incentive. So for any limited companies, LLPs or large partnerships, you can enjoy a considerable tax offset. With BCP, unlike contract hire, you can write off the full cost of the EV PLUS the interest you will pay on the agreement in year 1.

For example, if you have a £100,000 Porsche Taycan and the agreement incurs £10,000 of interest, you can write-off £110,000 from that profit which is subject to corporation tax. In this example, if you had £250,000 subject to corporation tax, your tax bill would be £62,500, as the main rate of corporation tax from 1 April 2023 is now 25%.

If the business had used the BCP on their Porsche, they would have reduced their profit subject to corporation tax to £140,000 which means a tax bill of £35,000. This example would equate to a tax saving of £27,500 in that year!

In contrast, contract hire (or leasing) would mean that you can only offset the rentals you have made in that tax year. So in the example above, if your Porsche had cost £1,200 per month and you had made a £5,000 initial rental, you would only have £18,200 to write-off against your corporation tax in that year.

And this would clearly provide a more insignificant tax saving. However, we do appreciate that high-value EVs, like the Porsche Taycan, Lotus Eletre and Mercedes EQS are more extreme examples of tax savings because of their vehicle value. As there are £20,000 - £30,000 EVs, this may be less formidable.

Do bear in mind that the advantages of contract purchase are specific to brand-new electric vehicles because they emit 0 g/km of CO2. Capital Allowances is an emission based regime, so for more polluting cars the same advantages do not necessarily apply. Speak to your company accountant or review the Governmental rules. 

Capital Allowances and Cars

And what happens at the end of the contract?

With a Contract Purchase the business has a final balloon or rental to pay. This is a pre-agreed value which is communicated to the customer at the start of the contract and before any electric car would be ordered.

When the contract ceases, the customer will have two key choices - 1) pay this final payment and own the vehicle to use or sell on to a 3rd party; or 2) return the EV to the finance company. In many ways the operation of the Contract Purchase can be similar to the contract hire situation.

In some cases, the finance company will include the RFL for duration (except any Gov increases), allow for maintenance to be included (service, maintenance, tyres and breakdown recovery) and allow for full fleet management. Additionally, the registered keeper on a CP will be the finance company and NOT the customer. 

So is contract purchase better on an electric car?

Much of the answer to this is circumstantial and will depend on appetites to risk, profits and the advice of your accountant. In all cases, e-car lease can offer you both a leasing quote and a CP quote so that you can work with your finance team / accountant on the numeric impact.

As a credit broker, not a lender or dealership, we are here to provide a number of solutions with key information on EVs to understand the impact on your business. However, we will never say you should or shouldn’t do something. Financial advice is well outside of our remit. 

In terms of the car shown, the Audi E-TRON GT SALOON 390kW Quattro 93kWh 4dr Auto [C+S] Pure electric vehicle, this is based on the following configuration: 

•  Daytona grey Pearl Paint
• Twin leather - Black with 8 way adjustable sports seats
•  E-tron sport sound
•  Radiator grille painted in body colour
•  20" aluminium alloy wheels in a 5 twin spoke design in gloss black
• Mode 3 AC charging cable 

In terms of the Audi e-tron GT - how does it perform?

The AWD option will have a 85 kWh usable battery which will offer 0 – 62 times of 4.1 seconds, 152 mph top speeds and 390 kW (or 523 hp). Expect a combined winter range of 220 miles with warmer weather allowing for 295 miles.

On charging, the 11 kW AC max will allow 9 hours and 15 min 0 – 100% charging times with the 268  kW DC maximum allowing 17 minute 10 – 80% times. A cargo volume of 405L is available with this car. It has a vehicle fuel equivalent of 124 mpg. This option cannot tow. This EV will have no Bidirectional charging.