About Leasing » Contract Hire
Contract hire is effectively just another kind of operating lease which is provided to those in both business and private sectors. Each contract can be made to suit the requirements of each individual and depending on need, can run from 2 to 5 years.
Why has contract hire become so popular? The tax incentives and lower administration levels (allowing for much more accuracy in any given budget) encourage businesses to opt for contract hire or car leasing. Limited companies, partnerships and sole traders are also eligible. So, it saves time and budgeting is simple with regular payments.
Effectively, the contract hire is an all encompassing management system for your vehicle. Offering sourcing, finance and eventual vehicle disposal, even car maintenance (tyre replacement, AA/RAC recovery and general maintenance) can be included if you so wish. Provision of a relief vehicle is also an option for any unfortunate breakdowns.
The finance company removes all the stress by dealing with all of the details of contract hire, from vehicle management to vehicle maintenance (optional).
So, how does it work?
When you enter into a contract hire agreement, regular, fixed payments are made. It differs from traditional HP in the sense that at the end of the term, you return the vehicle to the finance company. In many cases, this means deposits and monthly payments are lower than either a loan or HP in its most common form. Selling the car is no longer your problem because any depreciation in value has been factored into the initial agreement and payments will have been reduced with this in mind.
If you have opted for a maintenance package, this along with your estimated mileage, the model of the car and contract length will help to determine what your monthly payments will be. Looking after the car is important; anything beyond an acceptable level of wear and tear is likely to incur extra charges. Likewise with mileage that has exceeded the initial estimate.
Thanks to the numerous discounts and other advantages that are provided by the contract hire (and other similar systems); the UK market for contract hire is particularly healthy, with some finance companies having more than half a million cars under their management. Businesses, and to some extent individuals who are seeking the many benefits of the system are fuelling the level of demand.
The BVRLA or "The British Vehicle Rental and Leasing Association" is the representative body which oversees the industry. Ensuring service standards are kept high within the sectors that include contract hire, leasing and general car rentals, the BVLRA has more than 2.5 million vehicles operating within its membership. Also responsible for raising issues to MP's, especially with regards to the financial side of the industry. Within the industry, there are at least 50 companies that offer major supply with many others operating with less than 1000 vehicles in their fleets. Fleet News (a weekly publication) publishes the annual statistics for the relevant fleets.
As well as large finance companies whose main concerns are affinity car schemes and corporate fleets, there are also a multitude of smaller more independent brokers in operation. Perhaps the most established of these independent brokers is Next Vehicles, who currently supply (mostly to smaller businesses) more than 300,000 vehicles every year. Helping these small companies and private buyers unearth more cost efficient leasing options (by comparing prices across the field) is the main goal of Next Vehicles.
The lessor (Contract Hire Company) retains the ownership of the vehicle at all times. The lessee (company or individual renting the vehicle) at no point becomes the owner of the vehicle being leased.
VAT registered companies are able to claim back 50% of VAT on the finance element of the agreement, making contract hire extremely popular for these companies.
There are many benefits of the Contract Hire system:
- Easy and accurate budgeting on a monthly basis
- Off balance sheet
- Cash flow improvement
- Capital expenditure kept to a minimum
- Capital budgets protected
- Interest rates are fixed
- Allowable against taxable income (subject to the "half the excess rule" partial disallowance
- Can recover VAT on monthly rentals
- Risk of depreciation negated – finance company responsible for vehicle disposal
- If the car has private usage, then 50% of VAT (finance element) recoverable. If a business only vehicle, 100% recoverable. Service element VAT recoverable if maintenance included in contract.
Running of Vehicle
- Vehicle disposal not an issue
- Lower admin costs
- Support and advice throughout duration of contract
- For the duration of the contract road fund license supplied (vehicle excise duty paid)
- Maintenance packages – optional
- Breakdown cover – optional
- Replacement vehicle cover – optional
- GAP insurance – Optional
- If vehicle is declared a write-off by insurance company, GAP insurance provides cover for any shortfall between insurance value and any outstanding finance