Contract Hire and Personal Contract Hire
This is a convenient and hassle-free hire agreement, whereby the user simply pays
a fixed monthly rental for the use of the vehicle over a pre-determined term and
mileage. There's no risk of unpredictable residual values as at the end of the agreement,
the vehicle is returned to the funder for disposal. It's popular with business users
as it's both VAT and tax efficient and with private individuals who want fixed cost
motoring.
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.
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
Finance Lease
This is a VAT beneficial hire agreement for business users who want to handle the
admin of their vehicles and have the asset shown on their balance sheet. The hirer
can choose to pay the entire cost of the vehicle plus an interest cost over the
lease period and receive a percentage of the proceeds following the sale of the
vehicle or pay lower monthly rentals with a final balloon payment based on the anticipated
resale value of the vehicle.
Contract Purchase and Personal Contract Purchase
This is a purchase agreement with a difference in that it offers low fixed monthly
payments with the bonus that the user has no risk of a potential fall in the residual
value of the vehicle. This is due to a balloon placed at the end of the agreement,
which is guaranteed by the finance house and is determined at the start of the contract
based on the term and mileage that you choose. At the end of the agreement, you
can either pay the final amount and keep the vehicle or sell it/trade it in and
use the equity towards your next vehicle or simply hand it back to the finance company.
It's popular with companies who aren't VAT registered and private individuals who
want fixed cost motoring with flexibility.
Hire Purchase/Lease Purchase
This is a purchase agreement for a business or an individual who wants eventual
ownership of the vehicle which is acquired when all the payments, including the
option to purchase, have been made. part of the capital cost of the vehicle payment
may be deferred into a "balloon" payment at the end of the agreement, the anticipated
value of the vehicle.
|