What is Business Contract Hire and How Does it Work?

Introduction:

Business contract hire is a popular way for companies to lease vehicles for their business operations. In this article, we'll explain what business contract hire is, how it works, and the differences between business contract hire and other types of leasing.

What is Business Contract Hire?

Business contract hire is a type of leasing agreement between a business and a leasing company. Under a business contract hire agreement, the leasing company buys the vehicle and then leases it to the business for a set period of time, usually between 2 to 5 years. The business pays fixed monthly payments to the leasing company in exchange for the use of the vehicle.

Do You Pay VAT on Business Contract Hire?

Yes, businesses have to pay VAT on their business contract hire payments. However, the amount of VAT you pay depends on the type of vehicle you're leasing and whether or not it's used for personal use as well as business use. For example, if the car is used solely for business purposes, then the business can claim back all of the VAT. But if the vehicle is used for personal use too, then the business can only claim back the VAT on the portion of the lease payments that relate to business use.

Value Added Tax (VAT) is a tax that is added to the cost of most goods and services sold in the UK. In the case of business contract hire, VAT is applied to the monthly rental payments made by the business.

When a business enters into a contract hire agreement, they are essentially renting a vehicle for a fixed period of time, usually 2-4 years. The monthly rental payments are calculated based on the value of the vehicle, its expected depreciation over the rental period, and any additional services or maintenance that are included in the agreement.

VAT is added to these rental payments at the prevailing rate, which is currently 20% in the UK. This means that if the monthly rental payment is £500, then an additional £100 in VAT will be added, making the total payment £600.

However, businesses can claim back the VAT they pay on their contract hire rental payments, provided that the vehicle is used for business purposes only. This means that if the vehicle is used for personal use, the business may not be able to reclaim all of the VAT paid.

It's important for businesses to keep accurate records of their contract hire payments and the proportion of the vehicle's use that is for business purposes, in order to correctly calculate the amount of VAT that can be reclaimed.

What is the Difference Between Business Contract Hire and Leasing?

Business contract hire is a type of leasing agreement, but it's specifically designed for businesses. With business contract hire, the business doesn't own the vehicle, and at the end of the agreement, the car is returned to the leasing company. On the other hand, with a traditional lease, the individual or business leasing the car has the option to buy the vehicle at the end of the agreement.

What is the Difference Between Contract Hire and Personal Contract Hire?

The main difference between business contract hire and personal contract hire is who the lease agreement is between. Business contract hire is an agreement between a business and a leasing company, whereas personal contract hire is an agreement between an individual and a leasing company. Personal contract hire is often referred to as personal leasing.

What is excess mileage and how does it work?

Excess mileage is a term used in car leasing agreements to describe the additional mileage that a driver has accumulated over the agreed limit in their contract. In a lease agreement, the lessee agrees to pay for a set number of miles they are allowed to drive the car each year. If they exceed this limit, they will incur additional charges.

For example, let's say a driver has signed a lease agreement for a car with a mileage limit of 10,000 miles per year, over a three-year period. If at the end of the three years, the driver has driven 35,000 miles, they will have exceeded their mileage limit by 5,000 miles. The cost of this excess mileage will depend on the terms of the lease agreement, but it typically ranges from 5 to 20 pence per mile.

The excess mileage charges are applied to the lessee's final bill, which is usually paid at the end of the lease term. The charge for excess mileage can be significant, so it's important for drivers to accurately estimate their annual mileage when signing a lease agreement.

To avoid excess mileage charges, drivers can purchase additional mileage at the start of the lease term or simply be mindful of their driving habits throughout the lease period to stay within the agreed mileage limit.

Here are some pros and cons of business contract hire:

Pros:

1. Fixed monthly payments - this can help with budgeting and cash flow management
2. No depreciation risks - as the vehicle is owned by the leasing company, you do not have to worry about its depreciation value
3. Tax benefits - business contract hire payments can be tax-deductible if the vehicle is used for business purposes
4. Flexible terms - you can choose the length of the contract and the annual mileage allowance that suits your business needs

Cons:

1. No ownership - as the vehicle is owned by the leasing company, you will not own the vehicle at the end of the contract period
2. Early termination costs - if you need to terminate the contract early, there may be additional fees to pay
3. Mileage restrictions - exceeding the agreed mileage allowance can result in extra charges
4. Condition restrictions - the vehicle must be returned in a specific condition, with any damage or wear and tear outside of fair wear and tear incurring additional costs.

It is important to weigh up these pros and cons before deciding whether a business contract hire is the right option for your business.

Conclusion:

Business contract hire is a popular way for companies to lease vehicles for their business operations. Understanding the basics of business contract hire, including how it works, the VAT implications, and the differences between business contract hire and other types of leasing, can help businesses make informed decisions about their vehicle leasing options.

FAQs on business leasing