UK Vehicle Funding - Contract Hire and Leasing in the UK

Funding Options

Contract Hire - The Facts

Contract Hire is an agreement to lease a vehicle for a set period and mileage at fixed monthly costs. The monthly Contract Hire rental amount is based upon the original cost of the vehicle, the mileage that is covered and the Contract Hire rental period (for example 24 months). An allowance for depreciation is also factored in to the final Contract Hire monthly cost. Maintenance packages can be included within a Contract Hire agreement but these are not mandatory.

The main features of contract hire are:

• Contract hire is a Hiring Agreement where the vehicle remains the property of the Finance Company
• The vehicle is disposed of by the Finance Company at the end of the contract hire period
• The contract hire period is usually set between 2 and 5 years
• The contract is for a set mileage usually for a maximum mileage of 100, 000 for petrol engines and 120,000 for diesel engines

Have a look at some of the other benefits:

• Costs are fixed ensuring maximum control for accurate monthly and annual budgeting
• This form of funding is considered to be “off balance sheet” and the vehicle will not be shown as an asset within the company’s balance sheet
• It is tax efficient, with up to 100% corporation tax relief on rentals proportional to vehicle purchase price
• A low initial outlay, usually 3 months’ advanced rentals
• Contracts available for periods of 2 to 5 years depending on the vehicle usage (although this is amendable)

Finance Lease - The Facts

Finance Lease

Finance Lease is becoming an increasingly popular vehicle financing method. With a Finance Lease agreement, the monthly rental you pay is calculated by taking into account the actual cost of the vehicle, the period you want the rental to run and the forecasted future value (residual value) of the vehicle based on the annual mileage.
A final payment which is equal to the estimated future value of the vehicle is paid at the end of the contract. At the end of the contract period, the vehicle is sold and 98% of the sale proceeds returned to you.
If you decide to use a Finance Lease arrangement for your vehicle, there are usually two different options open to you:
Firstly, you have the option to spread the entire cost (cost of the vehicle and interest payments) in agreed monthly installments over the period of the lease agreement.
Secondly, you can choose to make lower monthly installments but then make one final payment (known as a balloon payment) at the end of the lease.
It’s worth noting that in a Finance Lease arrangement, you actually never become the owner of the vehicle. At the end of the lease agreement, the final balloon payment is made to the finance company and the vehicle is sold on to a third party.
Finance Lease as a vehicle funding option does have a number of benefits. Like Contract Hire, 50% (for cars) and 100% (for vans) of the vat payments can be reclaimed.

Vehicle for sole business use, 100% vat-recoverable, 50% VAT reclaimable if business/private use applies.
Flexibility - the option to exchange or dispose of the vehicle throughout the contract.
Disposal equity retained by user.
Option to include maintenance.

Hire Purchase - The Facts

Hire Purchase is a way of owning the car by making monthly repayments. Sometimes you need to pay a deposit up front, sometimes you don't. It depends on the finance company. Either way you make the repayments for an agreed period and after the final payment, the car is legally yours. Until then, it legally belongs to the finance company. although for all practical purposes you act as the owner. There are two main types of Hire Purchase:

Fixed interest hire purchase: monthly repayments remain constant throughout, no matter what happens to interest rates.
Variable rate hire purchase: monthly repayments increase when interest rates rise and decrease when interest rates fall.

Some Hire Purchase schemes make you pay an extra chunk of money if you settle the agreement before the end of the deal. Others don't. The only way to find out is to ask or read the small print. If you think you may pay off the balance early, it is worth going for a scheme that won't penalize you - some of the penalties can be stringent.

On balance sheet funding.
25% writing down allowance up to a maximum of £;3000.00 per annum.
Ownership.
Option to upgrade or dispose of the vehicle during the agreement.

Personal Hire - The Facts

Available to employees opting out of a company car scheme and to private individuals.

An alternative to a company car
Fixed monthly payment with the option to purchase at the end of the agreement.
Option available to include service and maintenance.

Further Reading

For more information about the benefits on Contract Hire, please click here.