Finance Lease
- Rated 4.9/5 on Feefo
- FCA authorised, FRN 315268
- BVRLA leasing broker member
- Part of Global Vehicle Group
Intelligent Vehicle Finance is a trading name of XLCR Vehicle Management Ltd. Authorised and regulated by the Financial Conduct Authority, FRN 315268. We are a credit broker, not a lender, and we may receive a commission from lenders for introducing you to them. All finance is subject to status, availability and individual funder criteria.
A finance lease lets your business use a vehicle without buying it, while keeping the risk and the reward of what it is worth at the end. You pay rentals over an agreed term, usually with a larger final payment, and when the agreement ends the vehicle is sold and your business keeps most of the proceeds. It is the agreement of choice for vehicles that will be modified, worked hard, or driven further than a contract hire funder would accept.
Key facts
- The funder owns the vehicle. Your business uses it and carries the risk on its end value.
- No mileage limit and no damage charges. The vehicle is not being handed back to a funder who needs to resell it in a particular condition.
- Most agreements carry a larger final rental, often called a balloon, set against what the funder expects the vehicle to be worth.
- At the end the vehicle is sold to a third party. Your business usually receives most of the sale proceeds as a rebate of rentals. You cannot buy it yourself.
- VAT is charged on each rental rather than on the full price up front. VAT-registered businesses can normally reclaim 50% of the VAT on the rentals of a car available for private use, or 100% where the car is used only for business; commercial vehicles follow the normal recovery rules.
- Rentals are a trading expense. Cars above 50g/km CO2 carry the flat 15% disallowance; at or below, full relief.
- Modifications are permitted. Tipper bodies, refrigeration, racking, cranes and livery are all normal on a finance lease.
- For accounting periods beginning on or after 1 January 2026, FRS 102 brings most leases onto the balance sheet. FRS 105 and IFRS 16 follow their own rules; ask your accountant which applies.
How a finance lease works
A funder buys the vehicle you have specified and leases it to your business for an agreed term. You pay an initial rental, then monthly rentals, and in most cases a larger final rental at the end.
That final rental is the important part. It is set against what the funder expects the vehicle to be worth when the agreement finishes. A higher final rental means lower monthly payments, because less of the vehicle's value is being repaid during the term. A lower final rental means higher monthlies and less exposure at the end.
Where a finance lease differs fundamentally from contract hire is who carries the risk on that end value. On contract hire, the funder does. On a finance lease, your business does. If the vehicle sells for more than the final rental, you benefit. If it sells for less, you make up the difference.
That single difference explains almost everything else about the agreement, including why there is no mileage limit and no end-of-contract damage charge. The funder is not planning to resell the vehicle for its own account, so it has no reason to police how you use it.
What happens at the end, and why you cannot buy the vehicle
When the agreement finishes, the vehicle is sold to a third party. Your business normally acts as the funder's agent in arranging that sale, and receives the great majority of the sale proceeds back as a rebate of rentals.
You cannot simply buy the vehicle yourself. If a lease agreement gives the lessee the right to acquire the asset, it stops being a lease and becomes something closer to a hire purchase or conditional sale, with different VAT and tax consequences for both parties. Funders therefore structure finance leases so that title passes to an unconnected third party.
The alternative to selling is a secondary rental period. Rather than disposing of the vehicle, you continue to use it for a further term at a much reduced annual rental. For a business running vehicles for six, seven or eight years, this is often the better outcome and it is worth asking about at the outset rather than at the end.
The January 2026 change, and why it matters less here
For years, the standard way to choose between contract hire and a finance lease was accounting treatment. Contract hire was an operating lease and stayed off the balance sheet. A finance lease went on it. Businesses that cared about gearing chose contract hire on that basis alone.
Following the Financial Reporting Council's 2024 periodic review, FRS 102 Section 20 was rewritten. For accounting periods beginning on or after 1 January 2026, lessees no longer distinguish between operating and finance leases. Most leases of either kind are recognised on the balance sheet as a right-of-use asset with a corresponding lease liability.
The practical consequence is worth stating plainly. The main accounting reason to prefer contract hire over a finance lease has gone. Both now appear on the balance sheet, both produce depreciation and interest rather than a straight rental charge, and both affect gearing in a similar way.
That does not make the two agreements the same. It means the choice between them is now a commercial one rather than an accounting one, and it comes down to three questions:
- Do you want to carry the risk on what the vehicle is worth at the end? Finance lease yes, contract hire no.
- Can you predict your mileage? If not, a finance lease has no mileage limit to breach.
- Will the vehicle be modified? If yes, a finance lease is usually the only realistic option.
Micro-entities reporting under FRS 105 sit under a different standard and are not affected in the same way. Companies already reporting under IFRS 16 have had leases on the balance sheet since 2019. Your accountant can tell you which regime applies to your company.
Finance lease against contract hire, the decision most businesses actually face
| Finance lease | Contract hire | |
|---|---|---|
| Risk on end value | Your business | The funder |
| Mileage limit | None | Yes, with excess charges |
| End-of-term damage charges | None | Yes, beyond fair wear and tear |
| Modifications allowed | Yes | Rarely |
| Balance sheet, from Jan 2026 | On | On |
| Benefit from a strong resale | Yes, via rebate | No |
| Exposed to a weak resale | Yes | No |
| Keep the vehicle long term | Yes, secondary rental | No, it goes back |
VAT on a finance lease
2026/27 VAT position checked against HMRC VAT Notice 700/64. Recovery depends on the qualifying vehicle, business and private use, partial exemption and VAT scheme; have your accountant confirm it.
VAT is charged on each rental as it falls due, rather than on the whole purchase price at the outset. For a business acquiring several vehicles, that difference in timing is often the reason a finance lease is chosen over outright purchase.
| What you are leasing | VAT recoverable on the rental |
|---|---|
| Car with any private use | 50% |
| Car used solely for business | 100%, depending on circumstances |
| Van, single-cab pickup or other commercial vehicle | Recoverable under the normal VAT rules; apportioned where there is private use |
| Double-cab pickup, payload one tonne or more | Recoverable under the normal VAT rules; apportioned where there is private use |
| Maintenance element, quoted separately | Normally recoverable, subject to normal VAT rules |
Corporation tax, and the pickup trap
Finance lease rentals are a trading expense, deducted against taxable profits. The same restriction applies as on contract hire: cars at or below 50g/km CO2 attract relief on the full rental, cars above that carry a flat 15% disallowance so you deduct 85%. Vans and single-cab pickups are unrestricted.
Double-cab pickups changed in April 2025 and this catches people out. Payload used to be the test, and it worked the opposite way round to most people's instinct: a payload of one tonne or more made it a van, which was the favourable outcome. Since 1 April 2025 for corporation tax and 6 April 2025 for income tax, payload is no longer the test for direct tax at all. Vehicles are assessed on primary suitability, and because a double-cab carries people and goods equally well, most are now treated as cars. The 15% restriction applies to them, and they no longer qualify for the Annual Investment Allowance.
VAT uses a separate definition: a payload of one tonne or more excludes a double-cab pickup from the car-specific VAT block. The normal recovery rules still apply, including business and private use, partial exemption and the VAT scheme.
The double-cab pickup transition is different for each tax. For benefit-in-kind, qualifying vehicles bought, leased or ordered before 6 April 2025 can retain van treatment until disposal, lease expiry or 5 April 2029, whichever comes first. For capital allowances, the transition requires a contract before 1 April 2025 for Corporation Tax or 6 April 2025 for Income Tax, with expenditure incurred before 1 October 2025. Hiring-cost expenditure from 1 October 2025 follows the car rules regardless of the hire-contract date.
Because the funder owns the vehicle, your business does not claim capital allowances on a finance lease. You deduct the rentals instead. If capital allowances matter, hire purchase puts the asset on your books and makes them available to you. Current rates and thresholds are in our company car tax guide.
Where a finance lease is clearly the right answer
Vehicles that will be modified. Tipper bodies, refrigeration units, racking, cranes, tail lifts, specialist livery. A contract hire funder is planning to resell the vehicle and will not accept it back cut about. On a finance lease the vehicle is yours to specify and yours to sell.
Unpredictable or very high mileage. There is no mileage limit and no excess charge, so a vehicle that might do 15,000 miles or might do 45,000 carries no penalty either way.
Vehicles you intend to keep a long time. The secondary rental period lets you run a vehicle well beyond the initial term at a much reduced cost.
Vehicles that hold their value unusually well. If you believe a vehicle will be worth more at the end than the funder has assumed, a finance lease lets your business keep that upside rather than handing it to the funder.
Unusual or specialist vehicles that funders will not write standard contract hire against.
When a finance lease is the wrong answer
We would rather say this before you sign.
A finance lease is usually wrong if you want a genuinely fixed, known total cost with no exposure at the end. The residual risk sits with you, and if the used market moves against you, you make up the shortfall. For a business that values certainty above all, contract hire does that job better.
It is also the wrong answer if you want to own the vehicle outright at the end. You cannot buy it. If ownership is the point, look at hire purchase.
And it is rarely the right choice for a single company car for a director who changes vehicle every three years. That is what contract hire is built for.
How the five agreements compare
| Finance lease | Contract hire | Hire purchase | PCH | PCP | |
|---|---|---|---|---|---|
| Who it is for | Business | Business | Business or personal | Personal | Personal |
| Do you own it? | No | No | Yes, at the end | No | Optional |
| Resale risk | You | Funder | You | Funder | Funder, if you hand back |
| Regulated credit? | No | No, consumer hire | Yes | No, consumer hire | Yes |
| Capital allowances | No, rentals deducted | No | Yes | n/a | n/a |
| Mileage limit | No | Yes | No | Yes | Yes |
| End of term | Sold, you keep most proceeds | Hand back | You own it | Hand back | Buy, hand back or part-exchange |
Read the detail on contract hire, hire purchase, personal contract hire and personal contract purchase.
If the residual risk is what puts you off a finance lease, business contract purchase shifts it back to the funder while still giving your company the capital allowances.
How Intelligent Vehicle Finance arranges it
Intelligent Vehicle Finance is a credit broker. We do not lend and we do not own the vehicles. We take your requirement, compare it across our funder panel, and set the options out in writing so you can compare like with like.
On a finance lease the two numbers that matter most are the final rental and what the vehicle is realistically worth at the end. A funder who sets the final rental high will show you an attractive monthly figure and leave you more exposed later. We will show you both, and tell you where we think the residual assumption is optimistic.
Intelligent Vehicle Finance is also part of Global Vehicle Group, whose brands have funded more than 70,000 vehicles, so behind the personal service sits genuine group scale.
Speak to us on 01752 429950, or request a callback.
Tax and road costs across the agreement
For cars registered from 1 April 2017, the standard annual VED payment after the first year is £200 in 2026/27, before any supplement. First-year tax depends on emissions; the zero-emission first-year rate is £10. Older registration rules can differ. Check what your agreement includes and who pays increases.
The Expensive Car Supplement is £440 a year in 2026/27 for five years from the second licence. It applies above a published list price of £40,000 for petrol, diesel and hybrid cars, or £50,000 for qualifying zero-emission cars registered from 1 April 2025. Relevant options count; a discount or used value does not set the threshold. Check the registration date and current VED rules.
The government plans eVED from April 2028 alongside VED: 3p per mile for electric cars and 1.5p for plug-in hybrid cars. It is not a current charge; legislation and implementation remain to be completed. The published starting rates are not a promise of later rates. Ask how your funder would handle the charge if the agreement crosses its introduction. See the government’s consultation response.
For a zero-emission company car available for private use, the published BiK percentages are 4% in 2026/27, 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30. The percentage is applied to the taxable car value; the driver’s tax then depends on their tax rate and circumstances. Petrol, diesel and plug-in hybrid cars have different bands. See the current HMRC tables and the later-year changes.
Tax information checked 27 September 2026. Rates and rules may change. This is general information; ask your accountant to confirm your position. These tax amounts are not vehicle-finance quotations.
Frequently asked questions
Can I buy the vehicle at the end of a finance lease?
No. If a lease gave the lessee the right to acquire the asset it would stop being a lease and would be treated more like a hire purchase or conditional sale, with different VAT and tax consequences. The vehicle is sold to an unconnected third party instead, and your business normally receives the great majority of the sale proceeds back as a rebate of rentals. If ownership is what you want, hire purchase is the agreement designed for it.
Is a finance lease still on the balance sheet?
Yes, and so is contract hire now. For accounting periods beginning on or after 1 January 2026, amendments to FRS 102 Section 20 removed the distinction between operating and finance leases for lessees, and most leases of either type are recognised as a right-of-use asset with a corresponding lease liability. The accounting difference between the two agreements has largely gone. Micro-entities under FRS 105 are subject to a different standard.
What is the final rental, and what happens if the vehicle sells for less?
The final rental, often called a balloon, is a larger payment at the end of the agreement set against what the funder expects the vehicle to be worth. Because your business carries the residual risk, if the vehicle sells for less than that figure you make up the shortfall. If it sells for more, you keep the benefit through the rebate. A higher final rental reduces your monthly payments but increases your exposure at the end.
Is there a mileage limit on a finance lease?
No, and there are no end-of-contract damage charges either. The funder is not planning to resell the vehicle for its own account, so it has no reason to restrict how you use it. That makes a finance lease well suited to businesses whose mileage is unpredictable or high.
Can I modify a vehicle on a finance lease?
Yes. Tipper bodies, refrigeration units, racking, cranes, tail lifts and livery are all normal. This is one of the main reasons commercial vehicle operators choose a finance lease, because a contract hire funder will not usually accept back a vehicle that has been modified.
How does VAT work on a finance lease?
VAT is charged on each rental as it falls due. VAT-registered businesses can normally reclaim 50% of the VAT on the finance rentals of a car that is available for private use, or 100% where the car is used only for business and is not available for private use, subject to the normal VAT rules. Commercial vehicles follow the normal recovery rules, which depend on business and private use, partial exemption and the VAT scheme. VAT on a separately supplied and invoiced maintenance package can normally be reclaimed, subject to the same rules. Ask your accountant to confirm the treatment.
What is a secondary rental period?
Instead of selling the vehicle at the end of the initial term, you continue using it for a further period at a much reduced annual rental. For a business that runs vehicles for six, seven or eight years this is often better value than replacing them, and it is worth discussing at the outset rather than at the end.
Are double-cab pickups still treated as vans on a finance lease?
For VAT, a payload of one tonne or more keeps a double-cab pickup outside the car-specific block, but recovery still depends on normal VAT conditions. Benefit-in-kind and capital allowances use a separate vehicle-classification test, under which most double-cab pickups are treated as cars. The double-cab pickup transition is different for each tax. For benefit-in-kind, qualifying vehicles bought, leased or ordered before 6 April 2025 can retain van treatment until disposal, lease expiry or 5 April 2029, whichever comes first. For capital allowances, the transition requires a contract before 1 April 2025 for Corporation Tax or 6 April 2025 for Income Tax, with expenditure incurred before 1 October 2025. Hiring-cost expenditure from 1 October 2025 follows the car rules regardless of the hire-contract date.
What should I ask about before choosing a finance lease?
Ask for the final rental, any retained share of sale proceeds, sale fees and the terms of any secondary rental period. Confirm who arranges the sale and what happens if the proceeds do not cover the final rental. Get written consent for planned modifications and ask your accountant to check the tax and accounting treatment.
Tax and accounting treatment depends on individual circumstances and on rates and thresholds set by HMRC, which can change at future Budgets. This page is general information, not tax or accounting advice. Please speak to your accountant about your company's position. Intelligent Vehicle Finance is a credit broker, not a lender, and receives a commission from the lender or funder when an agreement completes. A trading style of XLCR Vehicle Management Ltd, authorised and regulated by the Financial Conduct Authority (FRN 315268). Subject to status and availability. Reviewed by Stacey Smith, Brand Director, Intelligent Vehicle Finance. Existing review: July 2026.
Editorial responsibility: Stacey Smith, Brand Director, Intelligent Vehicle Finance.
Last updated: September 2026
Related guides
- Business contract hire vs finance lease - VAT, accounting, end-value risk and what happens at the end.
- VAT on business car and van leasing - Which VAT rule applies to each line of a lease invoice.