Business Contract Hire: What You Need to Know
This guide gives you the facts about Business Contract Hire to help you make your decision.
What is Business Contract Hire?
Business Contract Hire also known as Contract Hire or an Operating Lease, is a long term rental agreement.
You pay a monthly fee to use each leased vehicle for a set time and within a mileage limit.
The lease contract is normally fixed for 24 to 60 months and you choose the length you need for your business. The mileage limit is based on the annual mileage for your vehicles.
How Does Business Contract Hire Work with VAT and Corporation Tax?
Rental payments are tax deductible and so reduce how much corporation tax you pay.
If your car produces 50 g/km or less of CO2 you can claim 100% tax relief. For cars that create over 50 g/km of CO2, you can offset 85% of your leasing costs against corporation tax.
Also, if your company is VAT registered you can claim back 50% of the VAT on the lease costs of cars, even if there is some personal use. This assumes there is no exempt turnover and your company is not on the Flat Rate VAT scheme. This rises to 100% for commercial vehicles, but this assumes there is no private use.
And if your lease contract includes maintenance, you can recover 100% of the VAT on the maintenance element of the rental.
What are the Costs?
The cost of your lease deal depends on the vehicles you choose, the contract length and the annual mileage of your vehicles.
During the lease, you’re also responsible for repair and maintenance costs of each vehicle.
To fix these costs, you can add the Full Maintenance option to your lease contract for an extra monthly fee. This includes all regular servicing and routine maintenance. As well as MOTs, tyres, brakes, exhausts and batteries etc.
If you drive more than your mileage limit, you’ll have to pay an excess mileage fee. This is a pence per mile charge and is agreed before you sign your lease agreement.
There may also be vehicle damage charges if the vehicle’s condition is outside the "Fair Wear and Tear Guide" when it’s returned. You’ll get a copy of these guidelines at the start of your lease.
Is Business Contract Hire Right for Your Business?
- The initial rental payment is flexible to help you afford the monthly fee.
- The length of the lease and your mileage limit are set to what you need.
- Improved cash flow with a minimum capital spend. Because you only pay for the use of the vehicle.
- There are no vehicle disposal or maintenance risks as the future value is underwritten by the leasing company.
- Road tax (road fund licence or vehicle excise duty) is included in your contract.
- Option to add maintenance, tyres and recovery costs to the contract.
- Fixed monthly vehicle costs mean more accurate budget forecasts without unexpected costs.
- Reduced administration because the leasing company take care of road tax, vehicle registration, resale and maintenance (optional extra).
- The lease is generally ‘off balance sheet funding’ (subject to legislation change). This can improve your gearing ratio (assets to borrowing ratio) and possibly your ability to borrow in the future.
- Option to add replacement vehicle cover if the vehicle breaks down.
- Ending the lease early will cost you more because it’s designed to run for a fixed time.
- You’re charged extra for each mile you drive over your mileage limit.
- There’s no option to buy the vehicle so you’ll never own it.
- You must look after the vehicle. Because you’re charged for any damage outside the "Fair Wear and Tear Guide".
- Comprehensive vehicle insurance is essential.
- You’re responsible for repair and maintenance costs of the vehicle.
Have More Questions about Business Contract Hire?
Find out the answers to common questions on our website: Business Contract Hire FAQs.
Who is trueFleet®?
We’re here to help you find the right vehicle at the right price.
From your initial enquiry to the delivery of your car or van, we manage the whole process to save you the hassle.
We work with the leasing companies and dealers to find the best deals for you.
We’re authorised and regulated by the Financial Conduct Authority (FCA).
We’ve got over 30 years’ experience of finding the perfect cars and vans. As a result, you’ll enjoy special discounts and terms.