Contract Purchase

A Contract Purchase is a conditional sale agreement where the customer agrees to purchase the vehicle in return for making a number of fixed payments. The typical payment profile is a small deposit (Equivalent to 3 monthly payments) followed by a fixed number of monthly payments, over 24-48 months, with a final balloon payment based on the anticipated future value of the vehicle. What distinguishes a Contract Purchase from a Lease Purchase is that the funder guarantees to purchase the vehicle back from the customer at the amount of the final balloon payment (Hence these final payments are often referred to as ‘Guaranteed Future Value’ or ‘Option to Purchase’)

The basic Contract includes sourcing the vehicle, 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 and waiver of the final payment should the customer decide not to exercise their option to purchase. 

Maintenance and other ancillaries can be added if required

Key Benefits:

Low Deposit if required
Fixed monthly cost and accurate budgeting
Guaranteed future value and therefore no depreciation risk
Sourcing, disposal and administration handled for you
Fixed cost maintenance packages available
Full amount of vehicle depreciation allowable against Corporation or income tax

Contract Purchase is a more tax efficient and cost effective way for VAT Registered businesses to fund ‘expensive’ vehicles (See notes on taxation below). Contract Purchase is also an ideal method of Funding Vehicles for any non-VAT registered businesses.

Taxation and Contract Purchase

VAT

As it is the customer and not a Leasing Company that is purchasing the vehicle under a Contract Purchase Agreement no VAT is reclaimable on the vehicle. 

VAT is however both chargeable and reclaimable on the maintenance element of any Contract Purchase Agreement.

Corporation Tax and Income Tax:

A contract Purchase is a Conditional Sale Agreement and the vehicle is therefore treated as an asset within the customer’s business. The cost of the car is shown on the Balance Sheet together with the outstanding finance and the customer is entitled to claim the Capital Allowances.

The interest element of the monthly payment is wholly allowable against profits for taxation.

The reason that Contract Purchase is a more tax efficient method of funding higher value vehicles is that the Company gets 100% tax relief on the depreciation of the vehicle. With Contract Hire, the amount of the monthly rental price of the vehicle that is allowable against tax decreases as the value of the vehicle increases (See Section on Contract Hire) 

There is however a timing restriction on the tax relief in that the total amount of Capital Allowance that can be claimed on each vehicle is restricted to £3000.00 per annum except in the year of disposal where a balancing allowance is given. 

E.G.

If a vehicle was purchased for £20,000 and sold 3 years later for £10,000 the timing of the Capital allowances would be:

                        Year 1             £3000
                        Year 2             £3000
                        Year 3             £4000

The total amount that the vehicle has depreciated during its ownership is allowed against profits for taxation although the timing of the tax relief is waited towards the last year of ownership.