Business Contract Hire Explained
Car or Van Contract Hire (or car /van leasing as it is sometimes called) is simply a method of long term rental, linked to a mileage allowance, which can provide you a fixed monthly payment for the vehicle you want.
You can choose how long you want to keep the car or commercial van for, and simply send it back at the end of the contract and order a new vehicle. It is a really simple way to budget and fix your motoring costs, as all you do is insure and put fuel in your vehicle.
Why buy a car or van when they will lose value over time?
Contract Hire "Operational Leasing" protects you from the depreciation risk of owning a vehicle and can include maintenance cover/breakdown cover (optional), vehicle excise duty and much more. This method of vehicle funding is ideal for companies who do not want to tie up cash buying vehicles outright or have the financial risk of running their own car or van fleets.
Reduce the administration of buying, servicing (if part of the contract) and disposing of vehicles by contract hiring. Just hand the vehicle back at the end of the contract and order a brand new vehicle - it's as easy as that!
Below are a list of the advantages and benefits of contract hire leasing and the things you need to know about this method of vehicle finance. Please have a look at all the points so you are fully informed about this subject.
You may also want to look at the Contract Hire Jargon Buster under the Useful Information section as this explains many of the terms you will encounter.
Advantages and benefits
- Even though a vehicle actually costs more to buy, the contract hire lease rental for a more expensive vehicle may be less, due to the method of setting a contract hire rental. This is due to the different depreciation rates of vehicles.
- Contract Hire initial payments are usually three months rental but flexibility can sometimes be offered.
- Thereafter one fixed monthly payment, payable by direct debit, covers most costs, providing better cash flow forecasting.
- Enjoy the contract hire and leasing company purchasing spend power and discounts as they buy in bulk to gain big discounts.
- Freedom from disposal worries and risk, as the job of selling the vehicle is down to the leasing company.
- The driver of the vehicle may be able to buy the vehicle at the of the contract subject to the purchase price offered by the contract hire company being acceptable to both parties.
- The vehicle leasing company recovers the VAT on the vehicle purchase, which means the vehicle costs less to finance. This financial benefit is reflected in the rental you pay.
- Contract Hire provides "off balance sheet" financing which is useful when your company has high borrowings elsewhere.
- Reduced administration and risk as maintenance, mechanical repair, replacement car, breakdown recovery, tyres, batteries and exhausts can be part of the contract hire package.
- Vehicle Excise Duty (Road Fund Licence) is normally included on either non maintenance or with maintenance contract hire.
- You choose an annual mileage at the start of the contract and if you perform at a higher or lower level, the Contract Hire company will normally amend the contract lease rental for you, to reflect this.
- Once you place an order for your car or van, in the colour you want and with your accessories the leasing company sources the vehicle for your from their network of dealers. Or if you have a dealer you want to use, they may buy the vehicle from them, if your dealer offers the usual discount terms the leasing company enjoys.
- The car or van will usually be delivered nationwide to your door free of charge (UK Mainland) and at the end of the contract it can also be collected from your premises.
Things you need to know
- Always check the annual mileage and the total number of the contract hire monthly payments you will be making (including the initial deposit rental), if obtaining other quotations elsewhere, to ensure you are comparing like for like.
- Always ask if there is a document fee involved as if you divide this fee by the number of months in your contract, the "actual monthly" rental is higher than you think.
- VAT registered companies can only recover 50% of the VAT on the finance rental (100% on the service element of the rental).
- Business Contract Hire is a fixed contract to term and mileage. Go over the contractual mileage and you will pay an excess mileage fee charged at a pence per mile rate.
- There will be a termination charge, if you return the vehicle early to the contract hire company and this will vary between different companies.
- If you opt for a non-maintenance contract, then if the vehicle breaks down it is up to you to fix it. It is important you do maintain the vehicle as per the manufacturer servicing schedule.
- If you don't opt for breakdown cover as part of your contract check what the manufacturer offers FOC (normally its the first year only but does vary).
- If you damage the vehicle, it needs repairing and it is your fault, then this is not covered under the “with maintenance” contract.
- Glass and windscreen replacement is not normally covered under the "with maintenance" contract. This may be covered under your insurance policy however.
- If you return the vehicle in a damaged condition, other than "Fair, Wear and Tear", you may be liable for a bill.
- You need to insure the vehicle in line with the contract hire company requirements.
- If the vehicle is written off for any reason, you may be liable for the difference between the vehicle book value of the contract hire company and what your insurance company pays out.
- Carbon emissions of company cars will impact the tax relief available for businesses as well as the tax charge on the individual.
- This replaced the sliding scale system and has changed to a 15% restriction for contract hire leased cars with CO2 emissions over 160g/km.
- There is no lease rental restriction on cars that have a CO2 output figure lower than 160 g/km.
- Therefore choosing cars that have high CO2 figures over 160g/km will cost you more to run.