MANY companies are turning their backs on outright purchase of company cars and transferring to contract hire instead. Is this a wise move? What are the business benefits?
Editor Ralph Morton files this special report on business car contract hire.
LAST year Gordian Strapping, a specialist packing company, decided to swap its fleet of 24 company cars over to contract hire.
Previously, the Basingstoke-based packaging solutions company had always bought its own business cars.
So what made the company swap? Paul Marsh, the finance director at Gordian Strapping, explains his decision.
“It was for reasons of cost and certainty,” explains Mr Marsh.
“Contract hire gave a clear cost advantage in my calculations, and took the assets off our balance sheet. As well as this it also gave the certainty of regular monthly payments, for both the car and its maintenance,” Mr Marsh adds.
Those are all fairly clear reasons why your company may want to consider contract hire for your business cars.
It’s not for everyone, though. Some companies prefer to maintain control over their business cars – and purchasing certainly does that.
For many sole traders and micro businesses it might still be easier to use your own private car on business since business mileage may be limited, and administration is simple. (Although an alternative to owning worth considering is either personal contract hire – PCH – or a personal contract purchase scheme, referred to as a PCP.)
Nevertheless, contract hire does offer many advantages, something Mazda’s fleet and remarketing director, Peter Allibon, is keen to explain to small businesses.
Mr Allibon says he is actively working with small businesses who outright purchase and presenting the benefits of funding through Mazda Contract Hire, the brand’s own offering.
“We will be looking to grow our leased business and small fleet volumes through our franchised dealers,” explains Mr Allibon.
So why go for contract hire?
As Gordian Strapping’s Paul Marsh explained earlier, it does provide certainty: you can budget for the monthly cost. This saves troughs and peaks in your cash flow (when buying and selling) by smoothing payments over a 36 month or 48 month period. Contract hire also provides an additional line of financial credit that is separate from your other borrowings, allowing the latter to be used more resourcefully for working capital.
Another reason, as Mr Marsh explained, is the introduction of a definite cycle to the replacement pattern. And you can add maintenance packages to the rental in order to ensure all servicing and replacement components – such as tyres and exhausts – are covered.
Then there’s taking the cars off your books – there’s no more accounting for the depreciation of your company cars any more. Since April 2009 the writing down treatment for capital allowances on company cars has altered. This can change the rate at which you can claw back tax allowances as there is no longer a balancing charge on sale.
For cars with CO2 emissions between 111g/km and 160g/km the writing down allowance is 20% on a reducing balance basis; for cars with CO2 emissions above 160g/km, the writing down allowance is reduced to 10% on a reducing balance basis. Note that from April 2012 these rates will be reduced by 2%. Essentially, it means you will have to account for a car possibly 20 plus years, long after is has been sold.
With contract hire there is no writing down allowance. Instead, if the car has CO2 emissions below 160g/km, 100% of the rental can be put against your firm’s profit and loss account; above 160g/km there is a 15% restriction.
Nevertheless, it makes for a highly tax-efficient method of running your business cars – and don’t forget, 50% of the VAT on the rental is claimable, too.
It can’t be all good. What about the disadvantages?
It would be wrong, though, to suggest that contract hire is simply right. There are drawbacks.
With contract hire you are locked into a contract with expensive early termination clauses. So your business might change during the contract hire period, but you can’t change your car or the contract to reflect the changed nature of your business or, perhaps, your business circumstances.
You need to specify the number of miles you expect to average over the term of the lease period. This may be difficult to predict at the commencement of the contract hire agreement. Get it wrong by estimating too high and you may be paying for mileage you don’t ever cover; get it wrong by estimating too low, and you then up paying excess mileage payments.
Having said that, it should be possible to renegotiate the contract with your leasing provider halfway through the term if there looks like being a serious under or overshoot on the mileage.
Another area to watch is the return condition of the vehicle. You will find most leasing companies use the BVRLA fair wear and tear guide – click on the link to view it: the BVRLA guide to fair wear and tear – that details what is acceptable; and what is not.
The general advice, though, is to treat the car as if it were your own – keep it clean and tidy and repair any dents and scratches immediately. If not you could be liable to refurbishment charges, since the contract hire company has estimated the value of the car based on a fair condition. An unexpected invoice for remedial costs is not what you want at the end of the term.
And, finally, because you have been using the car, rather than owning it, you return the car to the contract hire company; there is no opportunity to buy it. And there’s certainly no equity in it. Some companies may well believe that it’s better to have paid for an asset that still has a value at the end of its business use.
So is contract hire for you?
Contract hire is a great way to outsource the acquisition and finance of your company’s business cars. It also removes them from your balance sheet thereby freeing up complex accounting procedures and improving cash flow.
But for all the money that you’ve paid out, there is no return on the money. You are also stuck into a contract that is expensive to terminate.
However, on balance, contract hire is worth considering if you currently purchase your business cars. If nothing else, it helps improve cash flow and uses an additional line of credit that does not affect your other borrowings. And, at this time in the economic cycle, making spare cash available is crucial to business survival.
Fleet Alliance expert comment on contract hire
As the article suggests, contract hire is an established offering in the UK fleet market, and like all offerings there are perceived pros and cons. I would like to focus attention on how we have worked to mitigate some of the drawbacks, writes Martin Brown.
Getting the mileage right: Fleet Alliance offers an automated mileage reports via e-fleet (online fleet management system) which helps keep clients on top of their mileage allowance
End of Contract Damage Charges: Fleet Alliance’s end of contract policy offers clients a ‘smart repair’ option which involves cars being re-conditioned prior to return to the lessor – this should in turn reduce end of contract charges. Another option taken up by some clients is to insure against end of contract surprises – one of our larger clients pay a L5 per month premium on their fleet which is used to offset any damage charges.
A good fleet management provider will work to honestly assess the pitfalls of any given product, and ensure all stakeholders do everything to minimise them.
Martin Brown managing director of fleet solutions provider, Fleet Alliance
Editor’s note
Following Budget 2012, the leasing tax break changes in April 2013: business cars with CO2 emissions below 130g/km qualify for the 100% tax break; those above have a 15% restriction.
Further information
These following advice centre articles might help you understand contract hire better. Click on the links to view the article.
