Contract Hire for Business Users

Contract hire is the long-term rental of a vehicle at a pre determined fixed price. The basic product includes sourcing of the vehicle, delivery, road fund licence, the benefit of any warranty and breakdown cover supplied by the manufacturer and collection of the vehicle at the end of the contract. Full maintenance packages can be added to include servicing, repairs, tyres, exhausts, batteries etc. along with relief vehicle cover and other breakdown Services. The terms are usually between 24 and 48 months with contracted mileage from 6000 to 50,000 per annum.

Key Benefits:

 Low Deposit
  Off Balance sheet financing
  Fixed monthly cost and accurate budgeting
  No depreciation risk
  Sourcing, disposal and administration handled for you
  Fixed cost maintenance packages available
  Inherent VAT saving:

Since August 1995 Leasing Companies have been able to re-claim the VAT on vehicles used for contract hire, whereas a VAT Registered business is not entitled to claim this Input tax (except on commercial vehicles and pool cars). The Leasing Company will then base its rental price on the cost of the vehicle net of VAT and this saving will be past on to the lessee as a lower monthly rental.

This means that Contract Hire is almost always the most cost effective and tax efficient way of funding vehicles in a VAT registered Company. (The only real exception being ‘High Value’ vehicles as detailed below under Corporation/income tax:) 

Taxation and Contract Hire:

VAT:

VAT is chargeable on contract hire rentals at 17.5% and is reclaimable by the lessee subject to a 50% restriction where there is a private usage element in the vehicle.

VAT on the maintenance elements of Contract Hire agreements is fully reclaimable.

Corporation Tax/Income Tax:

A Contract Hire Agreement is an operating lease and the payments made under the contract are therefore allowable against Corporation Tax within a Limited Company and against Income Tax for Sole Traders and Partnerships, subject to the following restriction.

The percentage of the funding element that is allowable against tax is calculated as follows: 

            12,000    +    (Cost of vehicle –12,000)
                                   --------------------------------
                                                       2 

E.G. For a vehicle with a capital cost of £20,000 the percentage of the funding element of the contract hire payment that is allowable is:

            12,000    +    (£20,000 – 12,000)
                                ------------------------        =   80 %
                                            2

Please note that this formula is always applied in a Limited Company situation but for Sole Traders and Partnerships the split may be based on the actual percentage of private use in the vehicle as agreed on an individual basis with the Inland Revenue. 

The maintenance element of the contract is wholly allowable.

The significance of this restriction in the amount of the Contract Hire Rental allowable against tax is that it becomes less tax efficient to Lease vehicles of higher value. Eventually the loss of corporation/income tax relief outweighs the inherent VAT saving of Contract Hire.

It is more tax efficient and therefore more cost effective to Purchase higher value vehicles than it is to Contract Hire them (See Contract Purchase). Using the Deloitte and Touche ‘Fleet Choice’ tax planning software the breakeven point occurs at £20,000 for Companies paying Corporation tax at the normal rate and £26,000 for Companies paying Corporation tax at the small companies rate.