Originally posted on: 23 October 2024
Updated on: 22 December 2025
A couple of weeks ago, I was contacted by a client who wanted to understand the tax and accounting differences between Contract Purchase and Business Contract Hire for acquiring a new company electric car.
It’s always challenging to explain the direct, tangible effects in general terms, and it’s much more effective when you have specific quotes in front of you for comparison. Late last week, our client emailed me the full details of Contract Purchase and Business Contract Hire quotes for a BMW iX i20. All the figures referenced here are taken directly from the quotes and are accurate as of 17 October 2024, when the quote was supplied.
With electric vehicles (EVs) still being a popular choice as a business vehicle (due to the low benefit-in-kind tax charge), many contractors and small business owners are exploring options for acquiring an electric car through their limited companies. If they are not looking for a purchased vehicle outright, then the decision often comes down to two choices: Contract Purchase (similar to Hire Purchase) and Business Contract Hire (leasing).
Each option has its own set of financial and tax implications, which can significantly affect the company’s cash flow, tax liabilities, and future financial planning. For limited company contractors, understanding the differences in tax treatments, VAT recovery, and overall costs are important considerations when making a decision.
Additionally, upcoming financial goals, such as applying for a mortgage, may play a role in choosing the best financing structure. In this blog, we’ll compare the tax effects, pros, and cons of Contract Purchase versus Business Contract Hire using real-world quotes for a BMW iX, helping you determine which option aligns with your business needs.
“…the service has been fabulous.”
Ah Mike, we think you’re pretty fabulous too!
Business Contract Purchase (BCP) Explained
Contract Purchase, often confused with Hire Purchase (which by the way is treated very differently for tax purposes), is a popular method to finance a vehicle. It begins with an initial deposit followed by monthly payments, and at the end of the term, you have the option to buy the car outright by making a final “balloon payment”.
From a tax perspective, a Contract Purchase is treated in the following way:
- VAT Recovery
The key to understanding VAT recovery lies in whether the Contract Purchase is a supply of goods, or services. That is, does the company take ownership of the car from the outset, or must it wait until the final balloon payment is made before ownership is transferred from the leasing company?
There are numerous things to consider here, and you might just find the answer in the fine print of the agreement. Other things to look at are the size of the final payment, and the option (or obligation) to purchase the car at the end of the period.
When considering the Contract Purchase agreement our client was given, it indicates the agreement is a supply of services. I say this mainly because the final balloon payment is significant, and at the end of the three-year lease, the amount that our client would have paid to the leasing company is significantly less than the price of the new vehicle.
As a supply of services, this means VAT can be partially recovered if the car is used for a mixture of personal and business use which is the most common scenario.
If the vehicle is used exclusively for business purposes (such as a pool car), your company may be able to reclaim 100% of the VAT on the finance element of the monthly payments, but the most common situation is where the car is used for both business and personal purposes, and only 50% of the VAT on the finance element of the monthly payments is recoverable. The VAT on any maintenance costs related to the vehicle can be recovered in full, provided they are for business use.
- Capital Allowances
Here we must also look at who holds ownership of the vehicle. Using the same logic as for VAT Recovery above, the leasing company retains ownership until the final balloon payment is made, so no capital allowances can be claimed in the first three years.
If, after three years, the company decides to make the final balloon payment, then ownership of the vehicle transfers to the limited company at this point. With the electric car emissions being below 50g/km, the company can then use the 18% main rate pool for calculating annual capital allowances for the business. Remember, this can occur only after the company has taken ownership of the vehicle.
- Ownership Flexibility
At the end of the term, your company has the flexibility to either return the car or make the balloon payment to own it outright. Up until the point of making the balloon payment, the car’s ownership remains with the leasing company.
However, there are some potential downsides:
- Higher Monthly Payments
Monthly payments for Contract Purchase are generally higher than Business Contract Hire since they cover eventual ownership. - Depreciation Risk
If your company chooses to own the car at the end, it also takes on the risk of depreciation, which will no doubt affect the car’s future resale value as cars do tend to depreciate over time. Its a risk to be expected though with vehicle ownership.
Business Contract Hire (BCH) Explained
Business Contract Hire (BCH), in contrast, is a leasing option where the company rents the car for a fixed period. At the end of the contract, the car is simply returned without the option for ownership.
Key advantages of Business Contract Hire include:
- Lower Monthly Costs
The monthly costs are generally lower than Contract Purchase since you are not paying towards ownership. This helps with maintaining company cash flow.
- VAT Recovery
With BCH, businesses can recover 50% of the VAT on the monthly lease payments if the car is used for mixed (business and personal) purposes, or 100% if used exclusively for business (such as a pool car). This can be a significant benefit for VAT-registered companies.
- No Depreciation Worries
Since the car is returned at the end of the lease term, your company doesn’t have to worry about the vehicle’s depreciation or resale value.
On the downside:
- No Asset on the Balance Sheet
Unlike Contract Purchase, there is no asset added to the company’s balance sheet, which could be a consideration if you prefer to show assets for financial reporting and seeking to present a stronger financial position. - No Ownership Option
The car must be returned at the end of the lease term, meaning you don’t have the flexibility to keep the vehicle if you decide you want to.
Real-World Comparison: BMW iX i20 Quotes
To illustrate the differences, let’s look at the specific quotes provided by our client for the BMW iX i20 SUV xDrive 40 Sport Auto. The value of the vehicle is stated as £71,725.
The Contract Purchase option involved an initial deposit of £3,600 followed by monthly payments of £686.71 for 36 months, with a final balloon payment of £29,699.38 if the company chose to own the vehicle. The total amount payable (excluding maintenance) came to £57,443.23. Additionally, there was a documentation fee of £99 and an option to purchase fee of £10, which we’ll exclude here in our analysis.
It’s not clear from the Contract Purchase if VAT is included in the deposit or monthly payments, but we will assume the car dealer has correctly removed any applicable VAT elements from the fees being charged, based on the limited company being VAT registered.
The Business Contract Hire quote, in comparison, involved an initial rental of £3,000 (excluding VAT) followed by monthly rentals of £545.24 (excluding VAT) for the same 36-month period. There was no option for ownership at the end of the lease. Here the agreement clearly states that all pricing excludes VAT.
Corporation Tax (Years 1 to 3)
For both the Business Purchase and the Business Contract Hire, the payments made to the leasing company are fully tax deductible in the P&L. This means the costs will reduce the Corporation Tax the company pays.
The BCP payments include a £3,600 deposit, which we will capitalise on the balance sheet (no impact on profit or Corporation Tax) for the time being. If the company ends up buying the car at the end of the contract period, we will add this to the purchase price of the car.
The BCP monthly payments are £686.71, which totals £8,241 per annum.
The BCH agreement has a £3,000 initial payment, and then monthly payments thereafter are £545.24. Year 1 costs will therefore total £9,543, and Year 2 and Year 3 costs will be £6,543.
Note there are no capital allowances in either option.
If our client decided to use the BCP agreement, and purchase the car after three years for £29,699, then they will get capital allowances of £5,994 in Year 4, saving the business £1,199 in Corporation Tax each year.
P11D Benefit-in-Kind (BIK)
Because the business is making a vehicle available for personal use, there will also be a benefit-in-kind charge on the employee and a small amount of extra Class 1A NIC due for the company. Being a fully electric car, these costs will be quite low.
The BIK taxable amount is the list price x BIK rate. For this current tax year, the BIK rate is 2%, and then increases to 3% the following year, and 4% in 2026/27. So for this year, for example, the BIK taxable amount is £71,725 x 2% = £1,434.50. This will be extra taxable income for the employee and will be taxed at their current income tax bracket.
The company must also pay Employer’s Class 1A National Insurance contributions at a rate of the BIK amount x 13.8%. This equates to an annual cost to the employer of £198.
“…the service has been fabulous.”
Ah Mike, we think you’re pretty fabulous too!
Financial Summary
So lets that a look at a financial summary for each option from a company perspective.
BCP
Table 1: Financial Summary of BCP Option
| Profit reduction | CT saving | Overall cost | |
| Year 1 | 8438 | 1688 | 6750 |
| Year 2 | 8537 | 1707 | 6830 |
| Year 3 | 8636 | 1727 | 6909 |
| Totals | 25611 | 5122 | 20489 |
If after three years, the company decides to purchase the car, this cost will be capitalised and will not appear on the P&L (and will not be tax deductible). However, capital allowances for the second hard purchase of a car will then be able to be claimed, with 5,994 being claimable in Year 4. If the company does not decide to purchase the car (unlikely as the balloon payment significantly under-prices the car) then the £3,600 deposit that was initially made will also get written off through the P&L, introducing a further cost for the business.
BCH
Table 2: Financial Summary of BCH Option
| Profit reduction | CT saving | Overall cost | |
| Year 1 | 9741 | 1948 | 7793 |
| Year 2 | 6840 | 1368 | 5472 |
| Year 3 | 6939 | 1388 | 5551 |
| Totals | 23520 | 5122 | 18816 |
Summary Comparison
In summary, Contract Purchase (BCP) offers the potential for ownership at the end of the lease term, which may appeal to companies looking to eventually add the car as an asset. However, it comes with higher monthly payments and the risk of depreciation. On the other hand, Business Contract Hire (BCH) provides lower monthly costs and avoids depreciation risk, but the company will not own the vehicle at the end of the term. The decision ultimately depends on whether ownership and potential asset value are important, or if maintaining cash flow with lower monthly payments is the priority.
FAQ’s
What is the difference between Contract Purchase and Business Contract Hire for a company car?
Contract Purchase gives you the option to buy the car at the end of the term, whereas Business Contract Hire is a lease where the car is returned at the end, with no option for ownership. There are numerous different types of contract purchase agreements so please make sure you read the fine print. The main issue to be aware of is who has ownership of vehicle during the contract purchase period.
Can I reclaim VAT on a Contract Purchase for a company car?
Yes, you can reclaim VAT if the car is used exclusively for business purposes. If the car is used for both personal and business purposes, only 50% of the VAT on the finance payments is recoverable. If you purchase a vehicle outright or enter into a Hire Purchase agreement no VAT is claimable unless the vehicle it’s purely used for business (such as a pool car).
What are the tax benefits of a Contract Purchase for an electric vehicle?
With a Contract Purchase, you will be able to claim capital allowances after the final balloon payment once the car becomes a company asset. This can reduce your taxable profit in future years. You can use the main pool rate of 18% to calculate your annual capital allowance claim.
Can I claim capital allowances with Business Contract Hire?
No, since you don’t own the vehicle under Business Contract Hire, you cannot claim capital allowances.
How does a company car impact Corporation Tax?
Both Contract Purchase and Business Contract Hire payments are tax-deductible, reducing your company’s taxable profit. However, capital allowances are only claimable if you own the car, and in the examples given above car ownership remained with the leasing companies for the first three years of the agreement.
What is the Benefit-in-Kind (BIK) rate for electric vehicles?
The BIK rate for electric vehicles is very low compared to petrol or diesel cars. For the 2024/25 tax year, the BIK rate for a fully electric car is 2%, increasing to 3% in the 2025/26 tax year.
How do I choose between Contract Purchase and Business Contract Hire for a company car?
Consider whether you want to eventually own the car, how much you can afford in monthly payments, and whether avoiding depreciation risk is a priority for your business.
Can I reduce my company’s Class 1A NIC by choosing an electric vehicle?
Yes, the Benefit-in-Kind (BIK) rates for electric vehicles are lower, which reduces the Class 1A National Insurance Contributions your company must pay.