What is the Effective Rental on Contract Hire?
- Fixed monthly costs.
- No residual value risk as this sits with the finance company.
- Additional services like with maintenance can be included.
- Low initial outlay, normally three months initial rental only.
- You can free up your finance house credit line by having your fleet financed on contract hire.
- One single monthly invoice for all your vehicle fleet thereby reducing administration.
- The vehicles do not appear on your balance sheet.
- VAT efficient for most organisations
When you are quoted a contract hire rental, you usually see rentals displayed excluding VAT, however as a normal VAT registered business, you cannot recover all of the VAT applied to the rental, if the vehicle has any private usage. If the vehicle is used 100% for business use with no private usage, the VAT is fully recoverable (provided you are VAT registered).
With private usage of the car however, the rules are different. It is quite easy to calculate the effective rental and our car leasing partner quotations will always display this on their official contract hire quotations, to make it really clear for you.
Effective rental calculation
The VAT on the service element of the rental is normally 100% recoverable - this assumes there is some business use. The normal items included in the service element are routine servicing and mechanical repair.
On the finance element of the contract hire rental, i.e. on non-maintenance contract hire for example, only 50% of the VAT levied can be recovered, if the vehicle has any private use.
Let's assume the finance element of the contract hire rental is £250 per month excluding VAT and the service element is £30 per month excluding VAT.
- £250 x 20% VAT (£50.00) = £300.00
- £30 x 20% VAT (£6.00) = £36.00
- Total rental including the VAT is £336.00
Only 50% of the VAT on the finance element is recoverable i.e. (£25.00) and 100% of the service element (£6.00).
On the above example the effective rental is as follows;
- £300.00 less 50% of the VAT (non-recoverable) is £275.00
- £30.00 for the service element (100% VAT is recovered - £36 less £6)
The effective rental is therefore £275.00 + £30 = £305.00 and this is effectively the true cost to your business. We have shown a sample of contract hire leasing rentals below based on Toyota contract hire, to give you an idea of the likely costs of leasing your next car, however all rentals shown are exclusive of VAT.
So in summary, while VAT is 20%, the quick way to calculate the effective rental on non-maintenance contract hire, if your vehicle has private use, is to always add 10.00% to any base rental excluding VAT i.e. £250.00 (the rental before VAT is added) x 10.00% = £275.00. This is the effective rental.
If it is full maintenance contract hire rental then you will have to wait until you get the leasing rental breakdown on the confirmed quote from one of our finance partners.
For further clarification and the full rules on this subject visit the HMRC website.
From £139.83 ex. VAT
From £148.31 ex. VAT
From £157.58 ex. VAT
From £178.38 ex. VAT
From £201.91 ex. VAT
From £247.29 ex. VAT
From £251.50 ex. VAT
From £270.49 ex. VAT
From £273.36 ex. VAT
From £277.67 ex. VAT
From £278.03 ex. VAT
From £280.35 ex. VAT
From £282.74 ex. VAT
From £287.96 ex. VAT
From £291.67 ex. VAT
From £302.95 ex. VAT
From £309.26 ex. VAT
From £362.15 ex. VAT
From £383.86 ex. VAT
From £566.59 ex. VAT
From £975.39 ex. VAT
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