Business car leasing - business contract hire, or BCH - means your business rents a vehicle from a funder for an agreed term and annual mileage, pays a fixed monthly rental plus VAT, then hands the car back. The business is the customer, rentals are quoted excluding VAT, and most companies can reclaim half the VAT and offset the rentals against taxable profit.
Key Takeaways
- BCH is a rental agreement: the funder owns the car throughout and there is no option to buy it at the end.
- According to HMRC's VAT Notice 700/64, a 50% block applies to VAT on car rentals where there is any private use - so most businesses reclaim 50% on cars, and 100% on vans used for business.
- Rentals are an allowable business expense, but HMRC applies a flat 15% disallowance on cars emitting more than 50g/km CO2. At 50g/km or below, 100% of the rental is deductible.
- If an employee or director uses the car privately, Benefit-in-Kind (BiK) tax applies. For the 2026/27 tax year, zero-emission cars sit at 4% of P11D value.
- You need a credit-approved trading business - limited company, LLP, partnership or sole trader - and you carry the mileage and condition risk, not the resale risk.
What's in this guide
- How does business car leasing work?
- Who can lease a car through their business?
- What can your business claim back?
- Will you pay company car tax on a business lease?
- What does a business lease cost each month?
- Business lease or personal lease: which is right?
- What happens at the end of a business lease?
- How to arrange a business lease, step by step
- Frequently asked questions
How does business car leasing work?
A funder buys the car, owns it for the whole contract, and hires it to your business for a fixed term and annual mileage. You pay an initial rental up front, then a series of fixed monthly rentals plus VAT. At the end you hand the car back. There's no balloon payment and no option to purchase.
The rental itself is the gap between what the vehicle costs to acquire and what it's forecast to be worth at the end of the term - its residual value - plus interest charges. That forecast is the funder's problem, not yours. If the used market falls and the car is worth less than they predicted at handback, they absorb it. That transfer of residual-value risk is one of the main reasons finance directors like contract hire.
Two things are fixed from day one: the term (usually 24, 36 or 48 months) and the annual mileage. Road tax (Vehicle Excise Duty) is included for the life of the agreement, and the funder keeps the vehicle taxed with the DVLA. Maintenance is optional and adds to the rental - it covers servicing, tyres and consumables, and it's worth pricing both ways rather than assuming.
Two things aren't fixed: your mileage and the car's condition. Go over the contracted miles and you'll pay an excess mileage charge, quoted in pence per mile in the agreement. Return the car with damage beyond fair wear and tear and you'll be recharged for it. Everything else - insurance, fuel or electricity, and any congestion or clean-air charges - stays with the business.
Who can lease a car through their business?
Any credit-approved trading entity can take a business lease: limited companies, limited liability partnerships, ordinary partnerships, sole traders and charities. You don't have to be VAT-registered to lease, but if you aren't, you can't reclaim any VAT - which changes the maths considerably.
Funders underwrite the business, not the driver, though directors are usually asked to give personal guarantees on smaller or newer companies. Expect to provide company details, bank details and, for a limited company, sight of filed accounts. Newly incorporated businesses aren't shut out, but underwriting is stricter and a director's guarantee is more likely.
Sole traders sit in an odd spot. You can lease a car in the name of your business, but because you and the business are the same legal person, FCA consumer credit protections may still apply and some funders treat the application more like a personal one. We've set out the detail in our guide on leasing a car as a sole trader.
What if the business has no trading history?
You'll usually still get an answer, just with more conditions attached - a larger initial rental, a director's guarantee, or both. Our team places business proposals with a panel of funders whose appetites differ enormously, and a decline from one is not a decline from all.
What can your business claim back?
A VAT-registered business can normally reclaim 50% of the VAT on car rentals, and 100% of the VAT on any separately itemised maintenance element. Rentals are also an allowable expense against taxable profit, though cars emitting more than 50g/km CO2 carry a flat 15% disallowance under HMRC rules.
The 50% VAT block on cars
According to HMRC's Motoring expenses (VAT Notice 700/64), the 50% block covers the private use of the car and applies to all charges paid for the rental under the leasing agreement. Commuting counts as private use, and HMRC treats a car as blocked if it's merely available for private use - actual mileage split doesn't come into it. Full recovery is possible in narrow cases: a genuine pool car kept at business premises, or a car used for taxi work, self-drive hire or driving instruction.
Vans are different. There's no 50% block on a commercial vehicle used for business, so a VAT-registered business generally recovers the VAT on van rentals in full. That's covered in our guide to van leasing for business, and the full car position in reclaiming VAT on a business lease.
The lease rental restriction
HMRC's guidance at BIM47714 confirms a 15% restriction on the deduction for hiring cars with CO2 emissions of more than 50g/km, for periods from April 2021. Below that threshold - which covers every pure electric car and a good number of plug-in hybrids - the full rental is deductible.
Illustrative example: a petrol car at £400 a month
Take a limited company leasing a petrol car emitting 120g/km at £400 a month plus VAT, on a three-year contract. These are round illustrative numbers, not a quotation.
- VAT of £80 a month is charged; the company reclaims 50%, so £40 comes back each month.
- Annual net rentals are £4,800. Because the car is above 50g/km, 85% is deductible - £4,080 - and £720 is added back.
- At a 25% corporation tax rate, that £4,080 deduction is worth £1,020 of tax relief in the year.
- Had the car been electric, the whole £4,800 would be deductible, giving £1,200 of relief on the same numbers.
Your accountant will handle the mechanics, including how the blocked VAT interacts with the restriction. The point for a decision-maker is simpler: sub-50g/km cars are treated better on both VAT-inclusive cost and deductibility. For the full accounting picture, see how business leasing affects your tax and accounts.
Why an electric company car changes the sums
Electric cars are the one area where the tax rules genuinely stack in a business's favour. Zero-emission cars sit below the 50g/km threshold, so 100% of the rental is deductible, and the driver's BiK charge is a fraction of a petrol equivalent. Where employees are involved, salary sacrifice can push the saving further still.
The catch is practical rather than fiscal: charging access, real-world range on long motorway runs, and whether the drivers actually want one. Talk to the people who'll be driving before you commit a fleet policy to paper.
Will you pay company car tax on a business lease?
Yes - if the car is available for private use by an employee or director, HMRC treats it as a Benefit-in-Kind (BiK) and the driver pays income tax on it. The charge is the car's P11D value multiplied by an appropriate percentage set by CO2 emissions, then by the driver's marginal tax rate. The employer also pays Class 1A National Insurance on the same benefit value.
The appropriate percentage is where fuel choice bites. For the 2026/27 tax year, pure electric cars are taxed at 4% of P11D value. Petrol and diesel cars scale with emissions across roughly the 15-37% range, with the higher-emitting models sitting at the top of that band, and diesels that aren't RDE2-compliant carrying a supplement up to the cap.
An illustration for 2026/27: a £40,000 electric car at 4% gives a taxable benefit of £1,600, so a 40% taxpayer pays £640 a year - around £53 a month. The same driver in a £40,000 petrol car at 30% faces a £12,000 benefit and £4,800 of tax. That gap is the single biggest reason company car schemes have gone electric. Our Benefit-in-Kind tax guide works through the calculation properly, and HMRC's company car tax guidance sets out the official position.
No private use at all? Then no BiK - but HMRC applies the pool car conditions strictly, and a car that goes home with one person each night won't qualify. If BiK is the sticking point, compare the alternatives in our guides to company car versus car allowance and salary sacrifice car leasing.
What does a business lease cost each month?
You pay an initial rental up front - usually a multiple of the monthly figure, such as three, six or nine months - followed by the remaining monthly rentals, all plus VAT. A 9+35 profile means nine months up front then 35 payments. The initial rental is rent in advance, not a refundable deposit.
Four things move the monthly figure: the vehicle and its discount, the term, the annual mileage, and how much you pay up front. Longer terms and lower mileage generally reduce the rental. Paying more up front lowers the monthly payment but doesn't reduce the total cost by much, so it's a cash-flow decision more than a saving.
| What's included as standard | What isn't |
|---|---|
| Use of a brand-new vehicle for the agreed term | Insurance - the business arranges its own |
| Road tax (VED) for the life of the contract | Fuel, electricity and charging costs |
| Manufacturer warranty | Excess mileage charges above the contracted total |
| Delivery to your business address | Damage beyond fair wear and tear at handback |
| Optional: maintenance, servicing and tyres | Congestion, clean-air and parking charges |
Set the mileage honestly. Understating it to shave the monthly rental is the most expensive mistake we see business customers make - excess mileage is charged per mile at the end, and it rarely works out cheaper than having contracted for the miles in the first place. If a driver's role changes mid-contract, tell us early; mileage can often be amended.
Worth comparing value across deals rather than fixating on one model - our car lease comparison page is a sensible starting point, and remember to compare like with like on term, mileage and initial rental.
Business lease or personal lease: which is right?
Business contract hire is cheaper for a VAT-registered business because rentals are quoted ex-VAT, half the VAT is recoverable on cars and the rentals reduce taxable profit. Personal contract hire (PCH) costs more per month but carries no BiK charge and no business credit check. The right answer depends on whether the tax relief beats the BiK bill.
| Feature | Business contract hire (BCH) | Personal contract hire (PCH) |
|---|---|---|
| Who signs | The business | The individual |
| Prices quoted | Excluding VAT | Including VAT |
| VAT recovery | 50% on cars, 100% on vans (if VAT-registered) | None |
| Corporation tax relief | Yes, subject to the 15% restriction above 50g/km | No |
| Benefit-in-Kind | Payable where there's private use | None |
| Credit assessment | Business, often with director's guarantee | Personal |
| FCA consumer protections | Limited - commercial agreement | Yes, regulated consumer agreement |
A rough decision rule from our experience: if you're a higher-rate taxpayer taking a petrol or diesel car with any real private use, the BiK charge often swamps the corporate saving and a personal lease wins. Switch to an electric car and BCH usually wins comfortably. If you're VAT-registered, buying a van, or the vehicle is genuinely a work tool, business leasing is the obvious route. The full comparison lives in our guide to personal versus business leasing.
What happens at the end of a business lease?
The funder collects the vehicle, inspects it and settles any charges for excess mileage or damage beyond fair wear and tear. There's no option to buy the car and no residual-value exposure for your business. You then either take a new contract, extend the existing one, or walk away.
Condition is assessed against the industry standard published by the BVRLA. Under BVRLA fair wear and tear standards, normal deterioration from everyday use - light scuffs, small stone chips - is acceptable, while damage from impact, neglect or missing equipment is not. The BVRLA recommends appraising the vehicle 10 to 12 weeks before it's due back so there's time to put minor issues right; their guidance on returning a leased vehicle is worth reading before collection day.
A simple pre-handback checklist
- Wash and dry the vehicle so any damage is visible in good light
- Check tyre tread and even wear across each tyre, including the spare
- Bring servicing up to date and make sure the service record is complete
- Gather all keys, handbooks, parcel shelves and - for an EV - the charging cables
- Remove company livery and any stored personal or client data
- Get repairs done professionally, with a transferable warranty on the work
Order the replacement well before the end date. Factory build slots on some models still run to several months, and nothing sours a good contract like a gap with no vehicle. Our overview of what happens at the end of your lease covers the process in more detail.
How to arrange a business lease, step by step
The process runs from choosing a vehicle to delivery, and typically takes days rather than weeks for an in-stock car. Six steps: pick the vehicle, agree the contract profile, submit the business proposal, sign the documents, arrange insurance, take delivery. A broker handles the funder shopping on your behalf.
Choose the vehicle
Set your budget and requirement first, then look at what represents best value within it. Check the CO2 figure - crossing 50g/km changes the deductibility.
Agree the profile
Term, annual mileage, initial rental and whether to add maintenance. Be realistic on mileage - this is where end-of-contract surprises come from.
Submit the proposal
Company details, bank details, directors' information and accounts where required. We place it with the funder most likely to say yes on the best terms.
Sign and insure
Documents are usually e-signed. Arrange fully comprehensive cover naming the funder as owner before delivery - the vehicle won't be released without it.
Then delivery, free to your business address, with the initial rental usually collected shortly afterwards by direct debit. From that point the vehicle is yours to run for the term.
Talk it through with someone who does this daily
Business leasing has more moving parts than a personal lease - VAT position, CO2 thresholds, BiK, credit structure, whether one director's car or a fleet of twelve. Our team has been arranging business contract hire for over 25 years, and we'd rather spend ten minutes getting the structure right than have you discover the wrong one three years in.
Call 0333 003 3325 and we'll talk through funders, profiles and what's actually good value right now.
Frequently Asked Questions
Sources
- Motoring expenses (VAT Notice 700/64) - HM Revenue & Customs
- BIM47714: restriction of car hiring costs - HM Revenue & Customs
- Tax on company benefits: company cars - GOV.UK
- Returning your leased vehicle - British Vehicle Rental and Leasing Association
Written by the business leasing team at First Vehicle Leasing, who have been arranging contract hire for UK businesses for over 25 years. FVL is authorised and regulated by the Financial Conduct Authority and is a member of the BVRLA. This guide is general information and not tax or financial advice.
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