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Should my business use contract hire?

If you’ve thought about contract hire before, but not quite gone down the leasing route yet, here are the advantages – as well as the issues – you need to clarify before you decide on the lease versus buy route
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17 March 2015

What are the benefits of contract hire?

  • It is the most popular company vehicle funding method in the UK, reckons top leasing provider Arval. It works equally well for small businesses as it does for larger corporates
  • Easy budgeting and cost control – plus you get tax benefits
  • Frees up your capital to work on your business, not a depreciating asset – with no hefty up-front costs
  • Competitive lease rentals – your small business will benefit from the fleet discounts it can negotiate
  • Say goodbye to risks – no more worrying about depreciation
  • You can choose virtually any model you want, car or van, on sale in the UK
  • Reduce the admin – and get on with running your business, not your business cars
small business team
Small business – is contract hire right for you?

SO, you already know the advantages of contract hire (for a summary, see our table).

It’s a highly competitive market, then there’s those low interest rates, plus the fact that all the routine maintenance can be covered in the contract and it’s an off-balance sheet finance product. In addition, there’s no residual value risk.

Then again, if you choose a contract hire vehicle, you will lose an element of control, as you will be using a professional company to supply and manage your corporate car.

Choose to terminate your contract early, or do too many miles and you’ll notice this change in control the most, as either will equal excess charges – which will cost you!

But, when should you as a business, consider using contract hire?

Well, if you’re making taxable profits and the advantages outweigh the disadvantages, which we’ll go through below, then we believe you should. So if your are thinking of lease versus buy how should you come to the right decision?

Discounted cash flow approach

Firstly, you need to compare the cash flows for different ways of funding and select the one that has the lowest costs. Can sound scary. But your accountant can help or your leasing provider will also have the tools to enable the analysis.

Include taxation in your analysis

Make sure taxation is part of this analysis, observing the differences for limited companies, sole traders and partnerships. It makes a big difference.

What about the VAT implications of contract hire?

Remember that VAT is chargeable on all lease rentals, but not on hire purchase or conditional sale payments.

Most businesses can partially recover the VAT through their returns, however if your company sells goods or services exempt from VAT, you won’t be able to recover it all.

Then again your business might not be registered for VAT at all.

Relationship with the contract hire company

The contract hire company does more than just supply the car, it maintains, administers and even gets rid of it at the end of the contract.

Before taking out any contract, you need to be happy that they have the ability to meet the needs of your business and can really add value.

Some contract hire companies work by having a team of people to manage your account on a day-to-day basis. On the other hand, some are very hands off and the key is to find leasing company that works with you the way you want.

In the end, contract hire can work very well for small businesses.

Do a bit of groundwork first and you should enjoy a fruitful relationship with your leasing company – and enjoy the benefit of a new car every three years.

 

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Ralph Morton

Ralph Morton

Ralph Morton is an award-winning journalist and the founder of Business Car Manager (now renamed Business Motoring). Ralph writes extensively about the car and van leasing industry as well as wider fleet and company car issues. A former editor of What Car?, Ralph is a vastly experienced writer and editor and has been writing about the automotive sector for over 35 years.

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