CONTRACT hire is the most popular way of leasing a business car.
More than half of all new company cars registered each year are funded using contract hire leasing.
So how does it work?
A vehicle is leased to an organisation for a set time and specified mileage, in return for an initial fee (usually between three- to six-months’ rental) and a subsequent monthly charge. At the end of the contractual period, it is returned to the leasing company.
This type of hire removes many of the risks of business car ownership, including depreciation, servicing costs if maintenance is included, and eventual sale.
With contract hire you lease a car over a set period of time and mileage for a monthly lease rate
Meanwhile your business benefits from the car leasing company’s greater buying power and knowledge of the used car market.
However, you could also miss out on any potential benefits of business car ownership, for example, lower than anticipated maintenance costs or an unexpected upturn in the residual value of a particular vehicle.
For most small businesses a three-year time span and an annual 10,000 miles is sufficient. You’ll often see this referred to as a 36 month/30,000 mile agreement. But you can vary it to your requirements.
In between, you drive the car over the agreed mileage. At the end of the agreement it’s returned to the leasing company. As long as the vehicle has been cared for, that’s it.
Because the car is owned by the leasing company, a contract hire vehicle does not have to be shown as an asset on your balance sheet. Some or all of the rental charge can be offset against taxable profits.
The key points to contract hire with maintenance:
- The contract hire company buys, funds and maintains the vehicle.
- The customer pays an agreed fee for a set time and mileage.
- The contract hire company pays all the bills (bar fuel and insurance).
- The benefits are: capital release (no costly overdrafts, or loans).
- Less risk (you don’t have to buy and sell the vehicle).
- Frees up your time to focus on your key business activities.
- Tax advantages.
- Cashflow and budget management.
- Up to 50% of the VAT recoverable on lease for VAT registered businesses (assuming some private mileage)
- Mike Lloyd is the managing director of www.CentralContracts.com
- For further comment on VAT and contract hire, see the Editor’s Blog Contract hire and VAT recoverability
- This story was first posted on 17 August 2006; it was updated on 12 June 2013.