Understanding Contract Hire

Business Contract Hire is a method of financing a vehicle that is usually accessed by VAT-registered businesses and companies, however sole traders and partnerships can also take advantage of contract hire.

It is a form of vehicle finance where the vehicle remains the property of the finance company, with the vehicle effectively hired out to a Business. Contract Hire involves leasing a car for an agreed period of time at a fixed monthly cost.

For private businesses that means cost-effective, flexible motoring. All servicing and maintenance can be provided – giving you peace-of-mind that everything is running smoothly with no unpredictable costs. At the end of your term, you simply return your vehicle and replace it with another one

ADVANTAGES OF CONTRACT HIRE

• VAT Payments - up to 50% of the VAT payments can be reclaimed. This is only applicable if your business is VAT registered.
• You choose the model of car that you want. All you do is pay one fixed monthly fee, keeping your costs low and predictable.
• Hassle-free motoring.
• Running costs e.g maintenance and servicing can be included for easier budgeting.
• No risk of unexpected vehicle depreciation.
• Free up capital - Business Contract Hire is an efficient way of running a fleet of vehicles. Rather than tying capital up in depreciating vehicles, the company is able to invest in other areas of the business.
• Currently, vehicle leases do not have to be shown on a balance sheet, which may improve a company's liquidity ratio, gearing and return on assets.
• Flexibility. Running a fleet using Business Contract Hire gives the company flexibility to respond to changing market conditions. Business Contract Hire agreements are typically between 24 and 60 months long, which allows the fleet to respond to changes to staffing requirements more efficiently than through alternative funding methods. This flexibility can also help business respond to changes in their Corporate Social Responsibility (CSR) guidelines. For example switching fleet vehicles to greener, more fuel efficient models.
• Tax advantages. Some or all of the rental charge can be offset against taxable profits.
• Latest technology. Because your fleet will always comprise of modern vehicles, your company could benefit from the latest fuel-saving developments in in-car technology.

THINGS TO REMEMBER

• No option to buy. Unlike some forms of business car leasing, there is no option to buy at the end of the contract.
• Beware of excess mileage. Have an accurate idea of the vehicle’s annual mileage requirement, underestimate and you will face additional charges if the agreed mileage limit is exceeded. Overestimate and you will be paying a higher monthly fee than you actually need.
• Damage. Standard wear and tear is allowed. The vehicle should be returned to the leasing company in a condition that meets the BVRLA ‘Fair Wear and Tear’ guidelines, otherwise charges may be incurred.
• Most business finance agreements are ‘unregulated,’ which means the same protections are not available for businesses as they are for consumers.