Leasing a Car
What is contract hire?

What is contract hire?

Contract hire is a car leasing finance option, available to sole traders, partnerships and limited companies.

Contract hire is very popular with VAT registered companies because they are able to claim back 50% of the VAT on cars and 100% on vans.

The reason why this is so popular with businesses is because it allows the company to focus on their operations without having to think about the financial risk of owning vehicles.

Contract Hire represents an agreement between two parties to lease a vehicle (car or van) for a set time period (and mileage) at a fixed monthly cost.

The monthly rental amount is based upon the original cost of the vehicle, the mileage that is to be covered and the length of the contract – typically two, three or four years. An allowance for depreciation is also factored in to the final Contract Hire monthly cost.

Maintenance packages can often be included within a Contract Hire agreement but these are optional, not compulsory. Such maintenance packages would typically provide cover for all car or van servicing within the period of the contract.

How does contract hire work?

The company hires a vehicle from a leasing company for an agreed duration and makes regular monthly rental payments. But the leasing company owns vehicle and is responsible for the associated risks. Once the contract has finished, the vehicle is returned to the leasing company.

Here is an example:

Example.com agrees a 48 month contract hire deal on a Peugeot Partner van with an annual mileage of 10,000. After the upfront payment of £920.28 + VAT, Example.com will then pay a monthly fee of £153.38 + VAT for the following 48 months. As Example.com is VAT registered, they will be able to claim back the VAT on the monthly payments. Once the contract has expired, the Partner van is returned to us and Example.com are free to lease another vehicle.

There are several advantages to contract hire agreements:

  • Fixed, low monthly rental payments.
  • Flexible contract durations and mileage rates.
  • Optional maintenance packages.
  • No depreciation risks.
  • Flexible invoice plans.
  • No large initial outlay.

Contract Hire is a very good option for VAT registered companies who do not wish to show their vehicles as an asset on their balance sheet. Plus you no longer have to worry about the residual value of the vehicle as this is all factored into the monthly rate.

You also have the freedom to change your vehicles on a regular basis; once the lease period has finished, you can choose another brand-new car.

If you would like a Contract Hire quote, please use our unique free instant quotation system.

Contract hire advice

With contract hire, there are several things that you need to know before you sign the paperwork:

  • The car does not belong to you: – The car belongs to the leasing company, but as such you do not have to worry about the residual value of the vehicle.

  • Study the contract terms: – Make sure understand the length of the agreement, the payment terms and any additional charges – such as excess mileage penalties.

  • Familiarise yourself with ‘fair wear and tear’: – As we previously stated, the vehicle is not yours. The vehicle should be returned in a reasonable state so it can be sold on. Refurbishment charges could be hefty, so it is imperative that you prepare yourself by reading the BVRLA Fair Wear and Tear guide a few weeks before you are due to return the vehicle. This may save you from a nasty surprise!

  • Check for termination charges: – If you wish to return the vehicle early an additional charge may be applied for terminating the contract.