Contract Hire is a finance agreement between a business and a finance company: the finance company owns the vehicle, and you are essentially
hiring it for a fixed contract duration, usually between two and five years.
What are the benefits?
- No depreciation risk — the finance company takes on the risk. If the vehicle is worth less than anticipated at the end of the contract,
you have nothing further to pay.
- No disposal worries — the finance company simply collects the vehicle at the end of the contract and deals with selling it on. Your contract
ends at collection and there's nothing further you need to do.
- VAT benefits — VAT-registered businesses can claim back 50% of the VAT on the rental on a car, and 100% on a commercial vehicle. If you opt
to include maintenance, you can always reclaim 100% of the VAT on the maintenance payment, car or commercial. Different rules may apply to businesses
on non-standard VAT schemes, such as cash accounting or the flat-rate scheme — you'll know if this applies to your business.
- Rentals are a business expense — you can claim back the rental payments against tax. For cars, 100% of the rental can be set against tax if the
car's CO2 reading is 50 g/km or less. Above this, 85% can be offset. For commercial vehicles, 100% of the rentals can be offset.
How does it work?
At the outset, you select the term and annual mileage, for example, 3 years and 10,000 miles per annum. This will give you a fixed monthly cost, which
can help with budgeting and cash flow. If you wish, you can also choose to include maintenance, which will cover you for routine servicing, MOTs and
replacement tyres, and allow you to further fix your motoring costs in advance.
At the end of the contract, the finance company will collect the vehicle, appraise its condition and take a mileage reading. If you're over the agreed
mileage limit, excess mileage charges will apply. The excess mileage rate is set in advance as a pence per mile cost.
They allow for fair wear and tear, which is any damage which can reasonably be attributed to the vehicle's age and mileage. if the vehicle has sustained
damage which exceeds fair wear and tear, the finance company may bill you for their costs in rectifying the damage.