Contract Hire FAQ

Your questions answered about Contract Hire

• What is Contract Hire?
• What contract duration and mileage allowances do you offer?
• Who owns the vehicle?
• Who insures the vehicle?
• Who carries the residual value risk?
• Who carries the ongoing maintenance costs?
• What is Non-Maintenance Contract Hire?
• What is Full-Maintenance Contract Hire?
• Is the vehicle cost on or off the company balance sheet?
• Typically how much cash is required up front?
• Who arranges vehicle collection and delivery?
• Does the customer own the vehicle at the end of the contract?
• Can the monthly payments be offset in full against Corporation Tax?
• Assuming some home to office use of the vehicle, are there any VAT benefits of Contract Hire?
• What happens if I want to finish my contract early?
• What are my options at the end of the contract?
• Is there anything to pay at the end of the contract?

What is Contract Hire?

Contract Hire is a finance method designed for maximum benefit for VAT-registered customers. It is designed to make motoring worry free, tax efficient and risk free.

What contract duration and mileage allowances do you offer?

We offer contract duration from 12 to 60 months on all of our quality used and pre-registered vehicles and 18 to 60 months for all new vehicles. Total mileage allowance is 160,000 miles. This includes any mileage that may already be on our used vehicles.

Who owns the vehicle?

The finance supplier owns the vehicle during the contract period. The customer can own the vehicle as a third party after the contract terminates.

Who insures the vehicle?

As the customer is the keeper of the vehicle, insurance is the customer's responsibility. Direct Car Leasing can quote low-cost motor insurance for business users.

Who carries the residual value risk?

The finance supplier. The finance company calculates a residual value at the time of quoting. If at the end of the contract the vehicle is worth less than originally expected, the financier is responsible for the loss. The second-hand car market is very unpredictable. Why should companies risk their profits by gambling with an unknown vehicle sale price when they come to sell in two, three or four years' time? The suppliers have dedicated used vehicle disposal functions that are expert at predicting and achieving the very best prices for their vehicles at the end of the contract.

Who carries the ongoing maintenance costs?

If a non-maintenance contract is chosen, the customer is responsible for all routine servicing and maintenance costs. Assuming a maintenance option is taken, the customer need never worry about any unexpected servicing or maintenance costs upsetting cashflow (and profits!). A blown bulb, a blown tyre or a blown clutch is only a freephone call away from a speedy, no-cost repair. Peace of mind that allows the customer to get on with running their business, rather than worrying about the running of vehicles.

What is Non-Maintenance Contract Hire?

A Non-Maintenance Contract is a contract where the customer is responsible for maintaining and servicing the vehicle as recommended by the vehicle manufacturer. The supplier does however supply the road fund licence for the full contract period.

What is Full-Maintenance Contract Hire?

A Full-Maintenance Contract is a contract where the supplier is responsible for maintaining and servicing the vehicle and includes all costs due to fair wear and tear. Additional facilities may be added to a Full-Maintenance contract such as RAC cover and relief vehicle cover.

Is the vehicle cost on or off the company balance sheet?

Off balance sheet. Contract Hire is the acquisition method that guarantees the vehicles will be off the balance sheet. This has the following advantages:

• Gives an effective cash injection or opens another credit line. Perhaps allows the customer to repay a loan or reduce an expensive overdraft.
• Reduces the company's assets or investment level, therefore increasing the return on investment ratio (the profit is now a larger percentage of the asset value). This will make the company look a better performer in the eyes of current and potential investors, including, of course, the banks.

Typically how much cash is required up front?

Typically a deposit of three monthly instalments is required. Six months may be required for a new-start business.

Who arranges vehicle collection and delivery?

We arrange both delivery and collection anywhere in the mainland UK.

Does the customer own the vehicle at the end of the contract?

No! The customer doesn't own the vehicle at the end of the contract. Is this a disadvantage? We don't think so! If you do own the vehicle at the end of the contract, it means that you have to go through the inconvenience of disposing of it and arranging finance for your next vehicle. At Direct Car Leasing, we come and collect your old vehicle whilst delivering your new vehicle. Nothing could be easier. If a third party wishes to purchase your old vehicle this can also be arranged.

Can the monthly payments be offset in full against Corporation Tax?

Yes. 100% of the monthly rentals may be offset against Corporation Tax. For vehicles costing over £12,000 a proportion is disallowed. To find exactly how much is allowable a simple calculation must be followed. This calculation is commonly known as the "Half the difference rule".
12,000 + 1/2 (Cost-12,000) x 100%
Cost

Example 1 If a vehicle costs £15,000, this is how the calculation works.

Vans are full tax efficient and so are not subject to this equation.

Assuming some home to office use of the vehicle, are there any VAT benefits of Contract Hire?

Yes. Following the VAT changes of 1 August 1995 Contract Hire has become even more desirable and more popular. There were three major changes.

1. Businesses can recover the VAT payable on the purchase of cars only if they are wholly for business use. Remember that even a single mile of home-to-office travel means that the vehicle does not qualify as "wholly for business use".
2. The financiers are able to recover all VAT payable on vehicles purchased, as they are purchased wholly for business use, regardless of the customer's use of the vehicle! This is where the major cost savings lie.
3. There is a 50% restriction for business on the recoverable VAT on leasing payments (not the maintenance element, which is still 100% recoverable, unless the car is wholly for business use). Whilst reducing the benefit slightly for the customer, the overall savings made are significant for Contract Hire.

What happens if I want to finish my contract early?

If you wish to end the contract early a termination charge is payable. This is usually 50% of the outstanding monthly rentals payable.

What are my options at the end of the contract?

The customer has three options available at the end of the contract period.

1. To hand the vehicle back and replace with a new one.
2. To extend the contract at a discounted rate, usually 5% for a six-month extension, 10% for a 12-month extension.
3. Ask for a purchase price and purchase as an individual. (The company cannot purchase the vehicle; this is due to the tax advantages that have already been achieved.)

Is there anything to pay at the end of the contract?

Hopefully not! Charges are made only if the vehicle has done more miles than contracted to do. This is called an excess mileage charge; the excess mileage charge will be written on the contract and will vary from vehicle to vehicle. To avoid this charge we encourage customers to advise us during the contract if they feel that more or fewer miles than originally expected are likely to be done and we will amend the contract accordingly. The only other charge would be if the vehicle had been damaged and not repaired.