Operating Lease (Contract Hire)

The most popular type of lease in the UK – also known as an operating lease.

Fixed monthly costs without any financial risk.

The running cost of cars and light commercial vehicles is one of the biggest expenses most businesses face. Add to that the risk of depreciation, and it’s no wonder Contract Hire is such an appealing option.

Whether a customer is running a single car or a fleet of 10,000 vans, contract hire enables them to control one of their biggest expenses. All the largest firms of UK accountants use contract hire.

Key customer benefits:

• The vehicle appears off ‘Balance Sheet’ as it is owned by the leasing company
• Tailor-make your own package with bolt-on products and benefits
• No financial risk associated with disposing of the vehicle
• Our considerable buying power enables us to pass on the savings to you the  customer through low cost rental as well as highly competitive ancillary products such as maintenance, foreign travel cover and accident management
• From April 2009, customers who rent cars with CO2 emissions below 160gm2 will receive even greater tax benefit.
• The convenience of a fixed cost maintenance agreement is optional.
• Road Fund Licence is provided for the full term of the contract.
• There is VAT recoverability at 50% for the supply of the vehicle and road tax licence. There is also VAT recoverability at 100% for optional services subject to the customer’s VAT status.

What is Contract Hire?

A Contract Hire agreement is an operating lease under which the funder accepts responsibility at a fixed cost for depreciation, funding costs, and administration and (usually) the provision of maintenance.
Contract Hire will benefit the customer who is seeking to remove assets from their balance sheet, eliminate the financial risk associated with disposing of the vehicle and enjoy the convenience of a full maintenance service, at a fixed monthly cost.
Contract Hire is for VAT registered companies that want minimum outlay and maximum cost control.
Under Contract Hire, vehicles continue to be owned by the funder yet are hired to the customer for a set period of time and at a fixed monthly rate.
Road Fund License is provided for the full term of the contract.

How does it 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.

What are the key features?

(a) Excess Mileage

Where an agreed mileage is exceeded during the contract hire period an excess mileage charge will be payable. This is calculated on ‘pence per mile’ set at the start of the contract. Excess mileage is calculated at the end of the contract and invoiced to the customer.

(b) Rescheduling

The original contract for a vehicle may be revised for an increase/decrease of mileage, term or addition of optional services.
Where there is a change to mileage or term of a vehicle the recalculation is made from the start date of the contract resulting in a credit or debit due and a revised rental.

What are the financial benefits?

(a) VAT Recoverability

The funder is able to claim back 100% of the VAT on the purchase price. The monthly rental cost is split between the finance and service elements of the lease.
Customers can claim back 50% of the VAT on the finance element of the rental* namely; road fund licence, interest cost, depreciation. Customers can claim back 100% of the VAT on the Service element of the rental* namely; maintenance, relief vehicle, service management fee, accident management. (*Subject to company VAT status)

(b) Tax Advantages

Leased company vehicles qualify for beneficial Corporation Tax treatment, as all rental payments on leased ‘business use’ vehicles (up to £12k value) are normally allowable in full for tax purposes. Similar benefits apply to leased vehicles costing over £12k subject to ‘half the excess’ rule.
The ‘half the excess rule’ applies to the whole of the rental, which includes; actual purchase price less residual value, finance cost, overhead recovery, road fund license, profit. Any additional services such as maintenance, accident management etc. is wholly allowable against corporation tax.

What happens at the end on the Contract?

Network offers a number of different options at the end of the contract.
Whether the Customer wants to keep the vehicle or dispose of it you as the Intermediary have the following options:

1. Purchase - We can produce a purchase price quote on your behalf, as long as the party buying the vehicle is not the Hirer or any of the Directors, Partners or their family members.
2. Hand the vehicle back - should the value of the vehicle be less than the set Residual Value or the customer wants no hassle in disposing of the vehicle. (Regulated & Un-Regulated) The customer should contact PVS and arrange collection of the vehicle (3 working days notice is required minimum). You must ensure the customer receives a copy of the hand over appraisal form and ensure that excess mileage is checked. Any damage on the vehicle or missing service history, keys etc will be charged as detailed in the BVRLA  ‘Fair Wear & Tear Guides’ which can be found on this website.
3. Formal Extension – The customer contacts you to request extending their existing contract. Re-Quote for 6 or 12 months and ensure all relevant documentation is drawn up and signed as appropriate.
4. Informal Extension – The customer continues to run the vehicle on the current rental for a period. However, it is important to note that in this instance we have the right to request a termination of this hire, and if maintenance is included we have the right to remove this at any time.