What Is Contract Hire?

Contract hire offers businesses (and to some extent individuals) valuable tax incentives (VAT-registered companies can claim back 50% of the VAT on the lease rentals) and reduced levels of administration. Packages can offer comprehensive vehicle management and a regular monthly rental structure which smooths cash flow and makes budgeting much more accurate.

Contract hire packages include the sourcing, finance and eventual disposal of the vehicle and can be tailored to include car maintenance (tyre replacement, AA/RAC recovery and general maintenance) and provision of a replacement vehicle in the event of a breakdown.

The car leasing finance company removes all the stress by dealing with all of the details of contract hire, from vehicle management to optional vehicle maintenance. Thanks to the numerous discounts and other advantages of contract hire, the UK market is particularly healthy, with some finance companies having more than 500,000 cars under management.

In a contract hire agreement, the "lessor" (car leasing company providing the contract) retains the ownership of the vehicle at all times. The "lessee" (company or individual leasing the vehicle) at no point becomes the owner of the car being leased. This differs from traditional hire purchase (HP) because at the end of the term, you return the vehicle to the finance company. This can often mean that your initial rental and monthly rentals are lower than you'd get from other forms of car finance.

The inevitable depreciation in the car's value is no longer your problem because this has been factored into the initial agreement and your rentals will have been calculated with this in mind. If you've opted for a maintenance package, this along with your estimated mileage, the model of the car and contract length will help to determine what your monthly payments will be.

Looking after the car is important—anything beyond an acceptable level of wear and tear is likely to incur extra charges. Similarly if your mileage exceeds your initial estimate then you'll be charged for it at the end of the contract.

• Easy and accurate budgeting on a monthly basis

• Cash flow improvement

• Capital expenditure kept to a minimum

• Capital budgets protected

• Interest rates are fixed

• Allowable against taxable income (subject to the "half the excess rule" partial disallowance);

• Risk of depreciation negated—finance company responsible for vehicle disposal;

• Can recover VAT on monthly rentals—if the car has private usage, then 50% of VAT (finance element) recoverable. If a business-only vehicle, 100% recoverable. Service element VAT recoverable if maintenance included in contract.

• Vehicle disposal not an issue

• Lower admin costs

• Support and advice for duration of contract

• Road fund licence supplied (vehicle excise duty paid)

• Maintenance packages (optional)

• Breakdown cover (optional)

• Replacement vehicle cover (optional)

• GAP insurance (optional)—if the vehicle is declared a write-off by the insurance company, GAP insurance provides cover for any shortfall between insurance value and any outstanding finance.