One of the most popular forms of car leasing for companies is contract hire. Whether a company has a few cars on its fleet or if it has a large fleet, contract hire is one of the most popular forms of car leasing. It is also know more technically as an operating lease.
There are many benefits for a company to contract hire vehicles, both operationally and financially. Contract hire is ideal for companies that want to reduce the financial risk of running company vehicles whilst reducing the burden of buying, servicing, administering and selling company cars.
Quite simply the company hires a vehicle for a pre-determined period and mileage for a fixed monthly price. At the end of the car lease period the company returns the car to the leasing company. The car leasing company owns the vehicle and is responsible for the taxing and maintenance of the car (with a maintenance package)
The main benefits of contract hire to the business user are as follows:
Fixed monthly cost and low start up costs
A contract hire agreement offers a fixed monthly payment for the contract period with normally three months rentals paid at the initiation of the contract. Contract periods are most commonly three years but one, two and four year periods are also available. Because contract hire offers a fixed monthly rental rather than ad hoc payments a company can budget more easily and have a predictable cashflow.
Free choice of vehicle.
Contract Hire allows you to choose any type, make or model of vehicle to suit your needs. Whether you want a small sports car, an economical runabout, a load lugger or an executive car you will be able to have it with a contract hire lease agreement. In some circumstances it is possible to lease 'used' or lease 'nearly new' vehicles. If certain criteria are fulfilled then companies can enjoy the benefits of contract hire, including all the VAT benefits, and enjoy very cheap car leasing.
Off balance sheet funding
Because the car leasing company owns the vehicle it will not appear as an asset on a company's balance sheet. What this means is that the company's 'gearing' is improved allowing the company to have the ability to borrow capital if required. With contract hire rentals are allowable against taxable profits (commercial vehicles fully, passenger cars proportionally)
Once you have chosen your car to lease, the car leasing company takes over from there. They will source your desired vehicle at the very best price (reflected in the monthly rental) and arrange for the vehicle to be delivered to you. They will ensure the tax disc is always current and provide breakdown assistance (eg the AA, RAC, Green Flag). At the conclusion of the lease they will collect the vehicle and will be responsible for selling the car, taking any residual risk themselves. If you opt for a maintenance package all servicing, tyres, batteries,oil etc etc will be paid for by the car leasing company. Again using their purchasing power they are able to attain very competitive prices which will be reflected in the monthly rental price.
The car leasing company can claim back the VAT on the purchase price of the new car. This saving is also passed on to the end user. The monthly rental is split into two elements, financing and maintenance. A VAT registered company can claim back 100% of the VAT on the servicing element of the rental cost and 50% of the finance rental cost.
The contract hire company takes all the risks involved in running a company car, from purchasing, selling, financing and servicing. However they are the experts at it, allowing the company to get on with what they do. All they company has to do is fuel it, insure it and oh yes drive it. The rentals are expenses and are allowable against taxable profits. The proportional allowable diminishes as the cost of the vehicle increases over £12,000