5.Contract Hire (Operating Lease)

Available to business users, normally only on new cars*. Contract Hire is popular with VAT registered businesses since it uses VAT legislation to its advantage.

On new vehicles there is a VAT proportion. With Contract Hire the vehicle effectively gets sold to the finance company who then 'rent' it back to you the customer.
Legislation says that since the finance companies involvement is 100% for commercial reasons they can recover the VAT when they buy the vehicle. This means that 17.5% less needs funding - with obvious benefits to interest and repayment charges. The 'rentals' you pay do attract VAT though of which normally 50% ** can be reclaimed.
The essential point to remember is that this is a non ownership product so you are not buying the vehicle but renting it.

Contract Hire provides users with no risk on the future value of the car. You simply state how many miles you anticipate doing and pick a term between 1 and 5 years (typically 3 years). At the end of the term you hand the car back and walk away with no ties. The car does need to be in an acceptable condition and you will pay an excess pence per mile for exceeding the agreed mileage but this is normally very reasonable.

Benefits

• Optional Maintenance contracts-provide totally fixed cost motoring
• extreemly VAT efficient since the finance company reclaims the VAT on the car purchase passing this benefit onto you
• The monthly rental can be offset to tax ***
• Low capital outlay allows funds to be kept in the business
• No risk on the future residual value
• No disposal problems at end of term
• Choice of 3 or 6 rentals in advance with flexible repayment structures that allow pauses at the beginning or end of the agreement
• 'Personal' Contract Hire is emerging for individuals- allthough in practice this can be very similar to PCP's anyway.

What's the Tax situation for businesses?

• ***100 % of the monthly rentals are allowable against tax for vehicles up to £12000, then 50% thereafter - under the 'half the excess rule'
• **Normally 50% of the VAT on rentals is reclaimable, in rare cases where the vehicle is used solely for business use, up to 100% is reclaimable
• Off- balance sheet facility - ensures sales results look favourable to capital employed
• The vehicle is not written down
• 100% of the VAT on the maintenance contract proportion is normally reclaimable

*NB. Leasing is normally only available on new cars due to their VAT status. However some used cars remain VAT qualifying or 'Q cars' because they themselves have only been used for business purposes, typically ex-lease cars or sometimes demonstrators