How Business Contract Hire works
Contract Hire is a popular choice for VAT-registered businesses looking for a tax-efficient way of leasing a brand-new car for a fixed monthly cost.
With Contract Hire, the vehicle is owned by the leasing company and simply ‘hired’ to your business for a pre-agreed duration. How much you pay depends largely on the amount the vehicle will be worth at the end of the contract. This means that the initial value, contract term, number of miles driven, and rate of depreciation all play a role in determining the monthly payments.
Each contract includes road tax for each year of the contract and there is also the option to add a maintenance package that covers regular servicing routines, repairs (some exclusions apply), MOTs, and tyres. Given the rate of inflation over the last few years, the ability to fix all these costs for up to 4 years is very attractive to most businesses. You can also add a breakdown cover and accident management service that will keep your drivers mobile and working for you.
Financial Benefits of Contract Hire
One of the biggest advantages of Contract Hire is that VAT-registered businesses can reclaim 50% of the VAT on the finance element and 100% of any servicing package. In theory, you could reclaim 100% of the finance VAT if the vehicle is used purely for business purposes, but this is quite unusual for cars.
Another benefit of Contract Hire is that leased vehicles don’t appear on your company’s balance sheet. This can be useful if you are looking to establish additional lines of credit elsewhere. You can also offset the rentals against Corporation Tax, although the amount you can claim will depend on the CO2 emissions. For example, in the 2023/24 tax year, vehicles which emit more than 110g/km are subject to a 15% penalty (bringing it down from 100% to 85%) on the amount of tax reclaimed.
Things you need to know about Contract Hire
The monthly payments are determined by the predicted resale value. Exceeding the agreed number of miles will have a negative impact on the worth of the vehicle, and so the leasing company will want to recoup this through an additional pence per mile charge. In some cases, it is possible to adjust the monthly payments if exceeding the initially agreed limit seems likely.
Under the terms of the leasing contract, vehicles must be returned with no more than fair wear and tear. The definition of what is considered reasonable is generally determined by the British Vehicle Rental and Leasing Association (BVRLA). Returning a car with additional damage will result in extra costs and so it is often best to get any damage repaired before handing the vehicle back.
Is Contract Hire right for me?
If you run a business that reclaims VAT at the standard rate then Business Contract Hire is likely to be a good option. That said, it is always a good idea to take financial advice from an expert before making a final decision.
If you have any questions about how Contract Hire works and what it could mean for your business and your drivers, just give us a call on 01785 713657 and we can talk it all through.
