Business Contract Hire

How it works
The Contract Hire company calculates the residual value for the vehicle based on the age, length of hire and the mileage it will be covering. They charge the user a monthly rental to cover depreciation over that period plus a funding charge, along with any add-on services required such as maintenance. The user has no risk in ownership and has a predictable monthly cost. The user effectively pays just for the use of the vehicle.

Popular with...
Companies who are VAT registered.

Risk
The funder assumes the risk of the residual value of the vehicle.

Advantages

• Low initial outlay
• The costs are predictable and risk-free
• The user has no risk of depreciation and disposal
• The vehicle is off balance sheet
• The rentals can be offset against the taxable profit
• The administration and management burden can be transferred to a third party
• Maintenance of the vehicle can be included as an option
• If the vehicle is used solely for business (i.e. pool car, commercial vehicle, daily rental) the user can reclaim 100% of the VAT on the rental. If it used for both business and pleasure, the user can reclaim 50% of the VAT on the finance element of the rental and 100% of the VAT on the maintenance element if included
• The contract generally includes road fund licence at the current rate for the complete term of the agreement

Disadvantages

• It is costly to early terminate the agreement
• It is important to correctly assess your annual mileage as an excess mileage applies at the end of the agreement. It may however be possible to reschedule your mileage during the contract if you incorrectly estimate it, or your circumstances change

Summary
The major beneficiary of the August 1995 VAT rule changes. Overall, a convenient and hassle-free funding method with tax and VAT advantages.