What is Contract Hire?
Contract Hire (or Business Contract Hire) is where you pay a monthly fee and have a fixed mileage limit. Similar to rental, Contract Hire requires that you pay for the use of the vehicle and simply hand it back to the finance company when you’re finished. The difference is that with Contract Hire, you do not have the requirements of a balloon payment or selling the vehicle, and you will be subject to damage costs and excess mileage charges. You will pay fixed monthly payments for an agreed period – at the end of the contract, you will then either return the vehicle or ask for an extension.
How Does The Payment Work?
The initial rental or deposit is the equivalent of 1 – 12 months’ rental costs in advance, plus the VAT on this figure. Contract Hire is also known as an operating lease but this term is rarely used. You can have the added option of a maintenance package which will give you a fixed cost for all your servicing, maintenance and tyre needs. You don’t have to worry about selling the vehicle at the end of the contract, or any depreciation.
What Are The Things I Should Know?
There are some important things you must take into consideration before taking out a Contract Hire agreement.
The contract is mileage sensitive – meaning that if you exceed the mileage limit given, you could be subject to extra fees at the end of your contract.
The vehicle is subjected to an inspection – where any reconditioning costs are charged to the customer. This is ideal for VAT-registered larger fleet operators.
Rentals are 100% allowable against taxable profits with no private use – you have total budgetary control with fixed costs, as long as you stay within the mileage. At the end of the contract, simply hand the vehicle back.
You do not have ownership of the vehicle – during and after your lease period, the vehicle is under full ownership of the finance provider. While you will have full use of the vehicle under your contract, it will need to be respected as a rental. Any customisations will need to be pre-approved by the finance provider.
Pros
- Fixed term and fixed cost agreement allowing you to budget for the duration of the contract.
- Maintenance, including servicing and consumables, can be added to your monthly costs.
- Flexible low initial rental.
- Monthly rentals can be significantly lower than other types of finance agreement.
- You are not at risk for the value of the vehicle at the end of the contract.
- Rentals are 100% allowable against taxable profits with no private use – fixed costs, as long as you stay within the mileage; at the end of the contract, simply hand the vehicle back.
Cons
- Fixed term agreement; it may be possible to extend formally with the consent of the leasing company, and this may result in a change to the monthly cost.
- The contract is mileage sensitive – excess mileage may result in additional fees.
- There will be an early termination penalty if you end the contract before the agreed termination date.
- On balance sheet finance.
- The vehicle is subjected to an inspection – any reconditioning costs are charged to the customer.
- You do not have ownership of the vehicle – it remains under the finance provider’s ownership; any customisations need pre-approval.
