Vehicle Leasing Explained

Contract Hire has become the most popular method of acquiring vehicles for private individuals, small and large businesses alike. Contract Hire provides an all-inclusive package that encompasses all the costs associated with running a vehicle covered under a fixed monthly rental. Contract Hire is available on any vehicle make or model and not only provides maximum protection from risk for companies who use it, but is also highly flexible to suit exact requirements.

How does Contract Hire Work?
A Contract Hire arrangement is based upon a fixed contract term from 24 to 60 months and a fixed mileage for the contract. These parameters are chosen to suit your exact needs and expected usage. From these parameters a fixed monthly rental is calculated which remains the same throughout the contract aiding budgeting as all costs are known in advance.

Fully inclusive maintenance cover can also be included. Again, this is a fixed cost as part of the monthly rental, and includes all maintenance requirements including regular servicing, tyre replacement and major mechanical failure. It doesn't matter how much work is required the monthly charge does not change, and there is nothing else to pay. Peace of mind, with no risk.

At the end of the contract the car is handed back to coincide with the replacement, simple as that. No need to worry about disposing of the car at the end of its life and the associated risks regarding the value of used cars.

From an accounting point of view Contract Hire holds many advantages over traditional outright purchase. Contract Hire is VAT efficient with 50% of the VAT on the finance and depreciation element of the rental being reclaimable, and 100% of the services and maintenance element. Companies who outright purchase their vehicles cannot reclaim any VAT.

Contract Hire aids cash flow as it removes the need to tie up large amounts of capital in depreciating assets, capital that could be better invested elsewhere in the business. Rentals can be entirely offset against corporation tax (up to £12,000 capital value), a huge advantage compared to restrictive writing down allowances in the case of owned vehicles as assets.

What are the benefits of Contract Hire?

• Lower monthly rentals as the finance company reclaims VAT on the vehicle purchase - benefiting your cash flow.
• You can reclaim 50%* of the VAT on the monthly rentals.
• The rentals are allowable against tax** reducing your tax liability
• Monthly rentals are fixed, making budgeting easier.
• You have no responsibility for the disposal of the vehicle.
• You can have the option of a maintenance program for your vehicle, avoiding any unexpected large bills.
• 100% of the VAT is reclaimable on the optional vehicle maintenance program, which is allowed in full against tax.
• You are not exposed to the depreciation risk against tax on your vehicle.
• Contract hire is an off-balance sheet facility.
• Your initial capital outlay is reduced allowing your funds to be retained in the business.

What are the disadvantages of Contract Hire?

• Early termination can be expensive.
• If you do more miles than stated in your contract you will be charged excess mileage for each mile over that stated in your contract.
• You must have fully comprehensive vehicle insurance.
• You will never own the vehicle as there is no option to buy it.

Lease Purchase is the ideal product for fleet funding if your company cannot fully reclaim VAT or if you are looking to fund an expensive car. Lease Purchase provides the perfect alternative for companies that want or require ownership of the vehicle and require the cash flow advantages of Contract Hire or Finance Lease.

Lease Purchase delivers a low monthly rental similar to Contract Hire and Finance Lease, but allows the using company to own the vehicle at the end of the contract.

How does Lease Purchase work?
Lease Purchase can provide the best of both worlds, by removing the need to tie up valuable capital in a depreciating asset, whilst providing ownership of the asset. The disadvantage is that Lease Purchase is not VAT efficient, therefore the VAT has to be either; paid in full up-front or funded into the calculation of the rentals. This makes the monthly payments for Lease Purchase higher than for Contract Hire & Finance Lease.

Lease Purchase is particularly suitable for high value vehicles as it attracts writing down allowances like an outright purchased asset. On vehicles with capital values of over approximately £23,000, Lease Purchase becomes more beneficial from a taxation point of view when compared to Contract Hire or Finance Lease.

What are the benefits of Lease Purchase?

• Your monthly payments will be reduced as a large percentage of the balance owed on the vehicle is deferred until the end of your agreement, with obvious cash flow advantages.
• Your initial capital outlay is reduced allowing your funds to be retained in the business.
• The interest is allowable against tax.
• Monthly payments are fixed so budgeting is easier.
• You can fund your vehicle as an asset on your balance sheet.
• You can claim writing down allowances.
• The finance element of your agreement is not subject to VAT.

What are the disadvantages of Lease Purchase?

• The balloon payment must be paid for at the end of the contract.
• The vehicle is yours once you have paid the balloon payment. In some cases the balloon can be higher than the residual value.
• Dedicated funding product, which does not include maintenance or any other value added services.
• You must have fully comprehensive vehicle insurance.