Businesswoman considering moving to contract hire
Contract hire: worth consideration
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YOU might think ‘so what?’ when I tell you that Virgin Media has decided to change the way it finances its company cars.

The company is moving its entire fleet, which includes commercial vehicles too, from finance lease to contract hire using the leasing company LeasePlan.

Virgin Media is a large 2600 vehicle fleet, so it’s looking for sophisticated care – fully outsourced driver services; fuel card management and analysis; and so on.

But the key point is moving from one form of business car finance to another. Why would it want to do that? Is there anything a small business can learn from Virgin Media’s example? And what are the advantages of contract hire?

Contract hire and its advantages for an SME

Well, unlike finance lease, there’s no vehicle to be sold at the end of the agreement. It’s much simpler: you hand the vehicle back to the leasing company at the end of the agreement. This is usually for a pre-agreed term (usually three years) and for a pre-agreed mileage (for most small businesses this is 30,000 miles). As long as the car meets the correct wear and tear conditions – you can’t return a car with dents, scratches and wrecked interiors – then that’s it. Time for another new car!

So that’s fairly straightforward: you pay for the use, not the ownership. That’s the leasing company’s issue and they will have to sell the car.

There are many advantages to contract hire rather than ownership.

 

  • One of the advantages of contract hire is a new line of finance, without affecting your other lending facilities

 

Additional funding for your business remains difficult to secure. The Forum of Private Businesses (FPB) reports that small businesses are still struggling to access finance even though they have future orders worth hundreds of thousands of pounds because banks are refusing to accept that strong order books and letters of credit prove they are viable.

“It is a fact that entrepreneurs need even more cost-effective lending in a recovery than during a recession so they can invest in their businesses in order to meet renewed demand,” explained the Forum’s finance director Nick Palin. “This is clearly not happening and there is a serious risk to businesses in the wider economy as a result,” Mr Palin added.

A new line of credit for your business

Contract hire provides a new line of credit that will not affect your company’s overdraft facilities or ability to secure lending, despite the difficulties of so doing outlined by the FPB.

Contract hire also allows accurate monthly budgeting for your cash flow and avoids the requirement to find a big cash lump sum to purchase a company car.

It provides a new car every three or four years, so your company drivers are always driving a new company car that features the latest fuel saving and safety technology.

There are some very good tax reasons why contract hire is attractive, too. Tax relief is claimable on the rentals.

Since April 2009, the rules governing contract hire changed. Out went the complex ‘half the excess rule’ to be replaced by a simple calculation that allowed 100% of the contract hire rental to be set against a company’s profit and loss provided the car was under the CO2 emissions barrier of 160g/km. But even above that 160g/km figure, 85% of the rental is allowable. (Editor’s note: from April 2013 the tax barrier reduces from 160g/km to 130g/km.)

In addition 50% of the VAT on the rental can be reclaimed.

But what are the drawbacks of contract hire?

There are, of course, some disadvantages. You are tied into a contract that is fairly inflexible. So if a staffer leaves, for example, the company car has to be reallocated, or you have to swallow the cost of contract exit charges.

There is company car tax to pay for drivers while your company will have to pay National Insurance Class1A on the benefit in kind provided.

The car needs to be cared for in your stewardship; company car drivers must realise it is their responsibility to maintain the car. Accident damage and scratches will require attention before the car is returned or the leasing company will charge you a reconditioning fee.

But overall, contract hire is simple and straightforward. And in these cash-strapped times, another source of funding for your business that leaves your money in the bank to develop and fund your company going forward.

Martin Brown, managing director, Fleet Alliance
Martin Brown – Fleet Alliance

Fleet Alliance comment on contract hire

From the SME running fewer than five cars to a massive corporation like Virgin, contract hire offers many benefits.

Fleet Alliance’s business model provides evidence to support my assertion; around 70% of our client base run fleets with less than 25 vehicles, and over 90% of our clients choose contract hire over our other funding methods. In recent years our offering has been extended to large corporate, too – the crux of what we offer each entity is the same, volume being the only real difference.

As the article highlights, cash is of crucial importance in the current climate – contract hire allows businesses to keep cash for their core operation, and is a VAT efficient, fixed budget funding method.

Our Fleet 360 model – backed by leading online fleet management software (e-fleet) – provides small businesses with all the benefits of an outsourced fleet that is normally associated with the large corporates. So, regardless of the number of vehicles operated, contract hire is definitely worth consideration.

Martin Brown

managing director of fleet solutions provider, Fleet Alliance

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