What Is Contract Hire?

Under Contract Hire, vehicles continue to be owned by the leasing company yet are hired to you for a set period of time and at a fixed monthly rate. This method of finance can be useful for companies wanting to free up credit lines or improve cash flow by implementing fixed cost fleet operation.

How Does Contract Hire Work?

The monthly rental charged is calculated based upon the cost of the vehicle, the contract period and the anticipated resale value. It is also takes into consideration the predicted mileage, service and maintenance costs, together with any additional services such as relief vehicles.

Under a Contract Hire agreement the funder retains ownership of the vehicle at all times and therefore continues to absorb the subsequent risks such as unforeseen running costs and uncertain resale values.

How Is Contract Hire Accounted For?

Rentals paid on vehicles under £12,000 are fully deductible against corporation tax. However, for higher priced vehicles only a proportion of the payments can be offset.

Where a vehicle has a partial private use then 50% of the VAT on rentals is recoverable, whereas the service and maintenance elements of the rental are fully recoverable.

Vehicles under Contract Hire are not recorded as assets on the balance sheet, thus improving company gearing.

What Is Finance Lease?

Finance Lease is a tax efficient option where you choose to pay either the entire cost of the vehicle, including interest charges, over an agreed lease period or opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle.

How Does Finance Lease Work?

At the commencement of the contract, usage parameters for the vehicle are agreed, and assuming this does not vary, monthly payments and interest rates are fixed for the duration of the contract. Therefore you benefit though fixed costs but do take on the administration and operating risks. At the conclusion of the contract you can continue to operate the vehicle under a "peppercorn agreement" although you will at no time take ownership of the asset.

How Is Finance Lease Accounted For?

Although the ownership of the vehicle remains with the leasing company for the duration of the contract, the car does appear on your balance sheet with the capital element of the outstanding rentals acting as the subsequent liability.

The rentals paid can be offset against taxable profits, although a proportion of the payments relating to the excess value of the vehicle over and above £12000 are disallowed.

What is Lease Purchase?
Lease purchase is a method of financing a vehicle, normally for vat registered businesses or companies. The monthly rental is determined by the cost of the vehicle, the period and the estimated future value of the vehicle which is based on the proposed annual mileage. A payment equivalent to the estimated future value is payable at the end of the contract, when the vehicle becomes the property of the lessee. Maintenance packages are often available, if required.

Lease Purchase is a cheaper monthly alternative to Hire Purchase, the traditional method of financing, and is written on a hire purchase agreement with the protections afforded by the consumer credit act.

 

What Is Contract Purchase?

Contract Purchase offers the facility to purchase vehicles over a predetermined period of time and at fixed monthly costs, without taking the depreciation risks normally associated with ownership.

How Does Contract Purchase Work?

The monthly payment takes into consideration the cost of the car, anticipated depreciation and mileage, as well as any service and maintenance options you wish to include.

At the end of the contract, ownership can be retained by making a final balloon payment. Alternatively the vehicle can be returned for resale by the funder, with no further payments due.

How Is Contract Purchase Accounted For?

The vehicle appears as a balance sheet asset for the duration of the contract, meaning that you can claim capital allowances at the rate of 25% per year on the reducing asset value of the vehicle (up to a maximum of £3000 per annum). However, unlike Contract Hire VAT is not recoverable on the monthly payments.

For vehicles over £12,000 a balancing charge or allowance is made on disposal of the vehicle, thus generating tax efficiencies by allowing for the full depreciation amount.

What is Hire Purchase?

The vehicle becomes the property of the lessee at the end of the period. The monthly payment is determined by the amount of deposit paid, the period of the contract and the sale price of the vehicle.

What Is Personal Contract Purchase?

Some companies are now looking at Employee Car Ownership (ECO) schemes as a viable alternative to regular funding methods. These schemes provide a mechanism for the driver to take personal ownership of their vehicle yet benefit from group buying power and tax efficiencies.

How Does Personal Contract Purchase Work?

The car is financed through a Credit Sale Agreement between the driver and leasing company. The employer pays the driver a monthly allowance which relates to the employee level and their choice of car. Taking this allowance together with the personal tax savings, as well as utilizing Inland Revenue approved business mileage allowances, provides the driver with a net monthly budget.

The driver has greater choice as they can trade up or down from their current company car level and pay more or less per month as appropriate. The employer can benefit from a reduction in the gross cost of providing drivers with a vehicle. However this is strongly influenced by the make up of the fleet and in particular the number of business miles conducted by a driver. Generally speaking, drivers need to be in the 10,000+ business miles bracket for this to be an effective choice.

How Is Personal Contract Purchase Accounted For?

As the foundation for ECO schemes is a direct contract between the leasing company and the driver, there are no corporate accounting regulations to adhere to.