With Contract Hire, in return for a fixed pre-determined stream of rental payments, the finance company supplies the vehicle and takes full responsibility for its depreciation, funding costs and administration. When (as in most cases) a maintenance Contract is included, this responsibility is extended to the provision of all servicing and repairs (excluding accident repairs but including
tyres, exhausts etc). It typically also covers the Road Fund License and, where specified, replacement vehicles as well. The rental calculation is based on time and mileage, and also the cost of maintenance where this is included in the contract.
So, Contract Hire is about the purchase of a service (not just a vehicle) at fixed pre-determined price - therefore quality of service can matter just as much as price. What’s more, the vehicle stays off the user’s balance sheet and hence should not degrade the user’s credit position as much as if it were on-balance sheet.
Since August 1995 the finance company has been able to reclaim the VAT levied on the price paid for the new vehicle, and these benefits are reflected in lower monthly rentals. The rentals themselves carry VAT. 100% of this VAT can be reclaimed by the hirer (assuming he/she is VAT registered) if the vehicle is used solely for business, and 50% if there is an element of private use, although this
does not apply to commercial vehicles, where in all cases 100% is recoverable. Where maintenance is included, 100% of the VAT levied on maintenance can be reclaimed; the finance company will specify how much this element is.
For vehicles costing less than £12,000, 100% of rentals for vehicles can be offset against taxable profits. For cars costing more than £12,000 the rental offset is restricted by the use of a disallowance formula.
Personal Contract Hire
As per Contract Hire, but tailored for private individuals not registered for VAT.
This is a conditional sale agreement, structured as the user contracting to purchase the vehicle over a set period of time. It typically incorporates full maintenance (like Contract Hire). There is usually a final balloon payment (i.e. a single large final payment), after which legal ownership passes to the user. In practice most users do not make this final payment, opting instead to return the
vehicle to the finance company, thereby avoiding the burden of disposal. The repayment figures and the maintenance element are based on time and mileage. Like other purchasing schemes the vehicle is purchased inclusive of VAT and repayments do not carry VAT except for the maintenance element, of which 100% is recoverable.
A fixed cost, fixed period loan to support purchase. The user is effectively the owner but title does not pass until the loan is fully repaid. It is on-balance sheet for the user. As they constitute loan repayments monthly payments do not carry VAT. The capital cost can be written down for tax purposes on a reducing balance basis with up to £3,000 capital allowances available against taxable
profits per annum. Interest (usually without limit) is also allowed against tax. These allowances may be restricted if there is an element of private use.
The following additional options are available:
This includes standard servicing as recommended by the manufacturer, other maintenance costs properly arising from normal wear and tear, Road Fund License, MOT and tyres (other than damaged or punctures).
Emergency breakdown cover
24 hour call out from one of the mainstream breakdown assistance providers, covering the first 100 miles of recovery.