Buying vs Leasing vs PCPing a Tesla through a UK LTD company
As I run my own limited company (I'm a one-man band building software) that's VAT registered in the UK, it's far more efficient for me to finance a Tesla (or any Electric Vehicle) through my business. This is mainly due to the tax write-offs, VAT reclaim and low benefit in kind (BIK) for Electric Vehicles ⚡️🚘
Recently, I sold some of my business assets which meant that I could comfortably afford to buy a Tesla Model 3 outright through the business. For the last 20 years of motoring I have bought all of my previous cars outright. However, over the last 5 years, my perspective has changed on buying cars (well, any depreciating asset) vs leasing/renting them. In the UK, there is a stigma attached to leasing/renting your car (and house) versus buying/owning them. People need to get over this outdated thought pattern and take a look at all the options with a fresh perspective 👀
Having a £50,000+ car sat on the drive, depreciating in value each and every day is not a wise investment in my eyes. There is an opportunity cost of having all the money tied up in a depreciating asset. As such, I set about creating a spreadsheet that would compare the total cost and tax savings over a three-year period for 3 financing routes:
1) Buying the car outright
2) Leasing the car (Business Contract Hire)
3) PCP (Personal Contract Purchase)
Hopefully this information will be helpful to someone out there in a similar position looking to buy a Tesla or comparable electric vehicle that wants to see a comparison of Buying vs Leasing vs PCPing.
My spreadsheet and figures are based on the total purchase price for the Tesla Model 3 I selected (Long Range, Red Multi-Coat, White Premium Interior, 18" Wheels) which at the time of writing costs £51,690.
FYI, you can download a copy of the spreadsheet for free at the bottom of the article. Also, if you prefer to watch my run through the spreadsheet then you can watch my video below (please drop a like if it helped you):
Disclaimer: I am not a financial adviser nor am I an accountant/tax expert. Please have your accountants verify the numbers with regards to your own personal circumstances. That said, the figures presented here have been verified by two accountants/tax advisors independently so they are correct to the best of my knowledge at the time of writing.
1) Buying the car outright 💰
This is the default option and is the "cheapest" financing option over a three-year period. However, it does mean you have all that money tied up in a depreciating asset rather than working for you.
VAT can only be reclaimed if the vehicle is for 100% business use and you must be able to provide evidence of this. In my situation, only a fraction of my total mileage would be business mileage so this would be a big fat zero VAT reclaim for me.
At first glance, the huge (19%) Corporation Tax rebate looks very appealing (around £9,800). In fact, I've seen several YouTubers simply write this entire value off the purchase price and think they're done. What they're forgetting is that HMRC will clawback the appropriate amount of corporation tax when you sell the car. So, based on the depreciation figures provided by Drive Electric, if you were to sell the Model 3 after three years it would be worth just under £30,000. But the bad news is that you would need to pay 19% of the sale figure back to HMRC ... so around £4,000. Suddenly, that juicy corporation tax discount doesn't look quite so appetising.
2) Leasing the car (Business Contract Hire) 🤑
Similar to renting a house, when leasing a vehicle you pay a deposit followed by fixed monthly payments. This means that you don't have most of your money tied up in the vehicle and you are able to make your money work better for you.
In the leasing scenario, once we've figured out our net monthly costs, we're able to deduct 19% Corporation Tax, knowing that we are not going to have this clawed back by HMRC at a later date.
There's also good news on the VAT front, in that we can claim back 50% of the VAT even if there is personal use. That means we can 50% of the VAT on the monthly payments and the initial deposit.
Side note regarding annual mileage when leasing from ALD automotive (Tesla's preferred finance provider at the time of writing). I assumed that if you said you were said you were going to do 10,000 miles p/a and you were under that each year, that you'd just pay the fixed amount regardless of whether you ended up doing a few miles under or were way under. However, this is not the case ... at the time of writing you will be charged 10.8p (+ VAT) per excess mile but you will also be credited at 8p under your allowance ... worth taking into consideration. FYI, below is the excess mileage calculation I used to figure out how much I'd pay if I went over my allowance.
3) PCP (Personal Contract Purchase) 💵
The PCP option is a halfway house between purchasing and leasing. With PCP, you have the option of purchasing the vehicle for a fixed balloon payment at the end of the term. However, this flexibility comes at a price as it generally necessitates a larger deposit and the monthly payments are more expensive.
Similar to the leasing option, we're able to deduct 19% Corporation Tax and claim back 50% of the VAT even if there is personal use.
Which is the best finance option for my Tesla? 🚘
Personally, I ruled out PCP as it was more expensive than leasing and would have tied up more of my money. So, it was then down to buying outright versus leasing. Buying outright would be about £1,500 cheaper than leasing over the three-year period (provided that the car held with current depreciation values and you could find a buyer at that price etc). However, if I could generate a return of more than £1,500 with the money that I would have had tied up in the car then I'd be better off with the lease option.
With around £45,000 to invest after the cost of first year's lease, if I can get a 9-10% return (the average return from the S&P 500 Index Fund for the last 100 years) on my money than I would have made a £4,000 profit in year one ... more than enough to negate the £1,500 from the buying outright option 📈
It gets better in year two as the £4,000 profit is compounded into the investment pot. Subtracting the cost of the lease for year two but including the £4,000, based on a 9% return again be looking at a profit of close to £3,800.
Rinse and repeat again for year three where we're looking at a profit around £3,500 and that brings us to a total profit of £11,300. Now, obviously this relies on the index fund performing at an average of what it has done. It could have a bad few years but equally they could be better than average years 🤷♂️
So Rick, how did you finance your Tesla? 🤔
You'd think from the above numbers and logic, that I would have picked the cheapest lease and invested the rest and an index fund as outlined above.
However, when I had my Tesla test drive I was completely blown away. I felt like I was driving a car from the future. I started researching the innovations at Tesla and was very impressed not only at what they've achieved so far but moreover what they have planned for the future.
I read many articles and watched countless videos from Tesla and Finance YouTubers regarding the future of Tesla. The further down the rabbit hole I went, the more impressed I became 👏
The TSLA share price has rocketed over the last couple of years. So much so that if in 2019, instead of buying a Teslas outright, if you'd have put that money into Tesla shares, you could have bought 10 Teslas two short years later 📈
Perhaps, a lot of the sharp growth has already happened but looking at the future roadmap and investing for the long term, I can't help but feel that it's worth a punt on Tesla shares rather than buying outright 🤞
With that in mind, I pushed the button on the lease and then on the 8th June 2021 I bought a Model 3's worth of Tesla shares with the plan to hold on to them for three years and see what their work at the end of the lease. If all goes well, then hopefully this approach will pay for part of the lease, if not all of it. Obviously, it could go disastrously wrong in the other direction but I feel long term it's a good bet.
You can see the real-time profit/loss figures from my investment at my shares tracker page and my quarterly blog updates. You can also stay up to date by subscribing to my YouTube channel where I'll be posting quarterly updates too.
Fingers crossed it's a good decision 🤞
To have the latest copy of the spreadsheet instantly sent to your email fill in the form below (if you can't see a form below then please go directly to https://rickontesla.ck.page/437dc75e34)