Leasing or car subscription? What would work better?

01/12/2021

When facing the choice of financing a company car and not wishing to buy it for cash, there are various options available to you. Credit is becoming less and less popular in favour of leasing and long-term rental. Which solution is better? Each has its pros and cons. The choice depends on your needs and expectations.

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Image author: Sergio Souza, source: pexels.com

What is leasing?

Leasing is a very convenient way of financing a car because of simple procedures (quicker compared to credit), broad availability and relatively low costs. As a business, you can deduct the costs of leasing from tax, you won’t tie up your own capital and you will not need any collateral. You can lease both new and second-hand cars, with passenger cars being leased most frequently, but you can also lease light goods vehicles with a total gross weight of 3.5 tonnes or less. Under the contract, the lessor supplies a car for use by the lessee in return for the payment of leasing instalments. This is a good solution for the self-employed and for people looking for a relatively cheap means of transport.

 

What are the costs of leasing?

Leasing costs comprise:

  • own contribution,
  • equal instalments, as defined in the contract,
  • the option of buying out the car by the lessee at the end of the contract.

The level of these costs depends on type of the car, its age, technical condition, accessories, depreciation period. The lessee is responsible for motor insurance, i.e. payment of third-party liability and comprehensive insurance premiums and for the vehicle’s operating costs.

 

Benefits for the lessee

By choosing leasing, you can include it as a tax-deductible cost and thus it can reduce the amount of income tax and VAT that is payable. The lessor may also offer an additional package of benefits, such as breakdown assistance, additional insurance, fuel cards, flexible repayment schedule, referencing the original value of the car to a foreign currency which enables hedging against foreign exchange risk. Vehicle operating costs (replacement of tyres, liquids, inspections, etc.) can also be included in the tax-deductible costs.

 

Financial lease vs operating lease

Are you wondering which type of leasing will be most optimal for your company? In the case of an operating lease, the car remains the property of the lessor and the lessee pays the instalments stipulated in the contract. With this option, both the instalments and VAT can be included in the costs. With an operating lease, fixed asset depreciation does not require to be written down. You can buy the car out at the end of the contract.

Financial lease (also called capital or investment lease) means that the subject of the lease is recorded as a fixed asset of the lessee, this meaning that you can make depreciation write-downs. In this instance, the instalment is divided into a capital and an interest part. The capital instalment is the repayment of the initial value of the car while the interest instalment can be treated as a tax-deductible cost. As the financial lease is regarded as delivery of goods, VAT has to be paid in advance at the time of signing of the leasing contract. The car becomes the property of the lessee at the end of the contract upon payment of the last instalment.

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What period can the leasing contract be signed for?

An operating lease contract can be concluded for the period of a minimum of 40% of the fixed asset depreciation period, which for a passenger car is two years on average. A financial lease contract is concluded for a definite period of time and is set individually with a leasing company.

 

When can you use leasing and what documents do you need?

If your company has been operating for at least one year without financial problems and you have good credit history, you should sail through the leasing procedure. Some companies reduce the required period for running the business for such sectors as law or medicine.

The lease application procedure is simplified for passenger cars or light goods vehicles. You will need the following data:

  • NIP (tax identification number), REGON (business statistical number),
  • the ID card of the owner or co-owners; a spouse’s ID card may be necessary (when conducting business as a self-employed person, a general or private partnership),
  • the lease application and information contained in it on the assets and liabilities of the business.

 
According to standard procedure, you will also require the following data in addition to those listed above:

  • balance sheet and profit and loss account,
  • PIT-36 statement,
  • CIT-8 statement,
  • statement on income and revenues (period depending on lessor’s requirements),
  • statement on absence of tax and social insurance arrears,
  • opinion of the bank where you keep your business account, 
  • statement on assets.  
 

What about lease insurance?

As a lessee you are required to insure the vehicle under the terms defined by the lessor. This applies both to operating and financial leases. The leasing company usually requires following terms:

  • fixed sum insured, which means that the sum insured from the date of taking out the policy remains the same throughout the policy year,
  • non-reducing sum insured, meaning that the sum insured may not be reduced by compensation paid earlier during the policy year,
  • single payment of the premium without the option of spreading it over instalments,
  • waiving the depreciation (without deducting the value of wear and tear of the parts),
  • absence of deductibles, reduced and integral franchises, meaning that the insurer will pay the entire compensation in the event of a loss,
  • settlement of claims exclusively at an authorised garage.

Usually you will receive an offer of insurance from the leasing company. However, it is worth comparing it with the offers available on the market as you may find a better one. Leasing companies sometimes have a list of companies they accept and they may charge a fee of several hundred zlotys for alternative external insurance. You also need to remember the date by which you have to take out another policy – sometimes this may even be 30 days before the end of the insurance period; the relevant provision can be found in the contract. If you fail to do this, the lessor will insure the car on their terms, which you will have to accept. 

 

Is it worth having GAP insurance?

It is worth having GAP insurance, i.e. insurance that covers complete loss or theft of the car. In this instance, you will receive an amount to compensate for the financial loss related to loss of the car. This means that as the car loses its value, the comprehensive motor insurance will cover the market value of the car, while GAP insurance will pay out the difference between the invoice value and the market value of the car at the time of the incident. The cost of GAP insurance is usually included in the leasing instalments.

 

What is long-term rental?

If you don’t drive a lot, don’t have time to service the car, want to ensure its good technical condition and availability at all times, and don’t want to buy it out after the expiry of the contract, then long-term rental is for you. Long-term rental of cars is more beneficial if you have a few cars, as you can receive additional options under the contract, such as servicing.  It differs from leasing in that you will not incur the costs of the initial fee. There is, though, the so-called initial rent, but the monthly instalments are lower in this instance. As the lessee, you also will not pay for third-party liability and comprehensive motor insurance. As part of the package, you may receive tyre replacement and storage, as well as a courtesy car for the time it takes to repair your car. You will sign the rental contract for 12 to 60 months and upon its expiry you can buy the car out or rent another one. From a tax perspective a long-term rental is regarded as an operating lease.

What do you need to do to rent a car?

1.   Select the car and package; this will determine the price of the subscription.

2.   Sign the contract and pay the initial rent, if applicable.

3.   Drive away the rented car.

4.   Pay the subscription every month in advance.

5.   Give back the car after the expiry of the contract and rent another one.

Worth remembering

1.   You are responsible for damage to the car: it is covered by comprehensive motor insurance, or else you pay for the repair from your own pocket.

2.   When going abroad, you need to obtain the consent of the rental company and pay for the issuing of such consent.

3.   A fee will be charged for every additional kilometre in excess of the limit stipulated in the contract.

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Tax costs of car leasing (frame?)

Leasing and long-term rental are covered by a quota limit!

Operating lease or rental of a passenger car valued at less than PLN 150,000 (internal combustion engine and hybrid) or PLN 225,000 (electric) – all leasing or rental related fees can be included in the costs.

Leasing or rental of a car valued at greater than the amounts defined above – in such case, the tax-deductible cost will constitute a part of the initial rental and every instalment which pro rata to the price of the car does not exceed PLN 150,000 (PLN 225,000 in the case of an electric car).

 

Long-term rental – ranking as of 1 October 2021

 

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