Under Contract Hire, vehicles continue to be owned by the leasing company yet are hired to you for a set period of time and at a fixed monthly rate. This method of finance can be useful for companies wanting to free up credit lines or improve cash flow by implementing fixed cost fleet operation.
How Does Contract Hire Work?
The monthly rental charged is calculated based upon the cost of the vehicle, the contract period and the anticipated resale value. It is also takes into consideration the predicted mileage, service and maintenance costs, together with any additional services such as relief vehicles.
Under a Contract Hire agreement the funder retains ownership of the vehicle at all times and therefore continues to absorb the subsequent risks such as unforeseen running costs and uncertain resale values.
How Is Contract Hire Accounted For?
Rentals paid on vehicles under £12,000 are fully deductible against corporation tax. However, for higher priced vehicles only a proportion of the payments can be offset.
Where a vehicle has a partial private use then 50% of the VAT on rentals is recoverable, whereas the service and maintenance elements of the rental are fully recoverable.
Vehicles under Contract Hire are not recorded as assets on the balance sheet, thus improving company gearing ratios.
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Many people buy their cars, either hire purchase or with cash. But there's also the option to lease a vehicle. This happens more with companies and businesses that offer company cars to employees. But car leasing is an attractive option for private individuals, since it requires no deposit - however, you will be asked to pay a fee generally equal to the first three months' rental.
Types Of Car & Van Lease
An operating lease, or contract hire, means that the car is hired for a fixed period (normall between 24-60 months), and a fixed rental is paid, based on the anticipated mileage to be used. It can come with or without a maintenance agreement. At the end of the lease the vehicle is returned to the finance company, which re-sells it. As much as 100% of the cost of rental can be offset against taxable profits and up to 100% of VAT on the leased car can be reclaimed, depending on the situation.
Under a finance lease, the leasee takes responsibility for selling the vehicle at the end of the lease period to settle a pre-agreed residual payment. A payment equivalent to the estimated future value is payable at the end of the contract. At the end of the contract period, the vehicle is sold and if the sale amount exceeds the residual payment, the lessee keeps the difference.
There's also lease purchase, under which the lessee owns the vehicle after all payments, including the option to purchase payment at the end, are made. Lease purchase is a cheaper monthly alternative to hire purchase, the traditional method of financing, and is written on a hire purchase agreement with the protections afforded by the Consumer Credit Act. A personal lease has a residual payment incorporated into the lease. If the lessee pays it, he owns the vehicle. Alternatively, it can simply be returned to the finance company.
Your Lease Responsibilities
When you lease a car, you're entering into a contract. That gives you certain responsibilities to take care of the lease car and return it in a certain condition - as with any contract you should read the small print. Different lease companies set different conditions, so sit down with your contract and read through it carefully.
You'll also need to have your car serviced at regular intervals at a franchised dealer or approved servicing agent, usually every 10,000 miles, or as specified by the manufacturer or leasing company. Unless you have a maintenance agreement on your lease, you'll need to arrange and pay for this yourself.
You'll be responsible for obtaining insurance on the car, and (depending on the type of lease) keeping up the road fund tax
Returning the Lease Car
You need to be very aware that the car must be returned in good condition, with an allowance for fair wear and tear. The finance company will have the vehicle inspected, and you'll be assessed a charge for excess wear and tear as shown under the guidelines of the BVRLA - British Vehicle Rental and Leasing Association. Charges are most often assessed for:
rips, stains, burns and tears on seats.
damaged or scratched paintwork.
bodywork chips and dents.
damaged wheels and trims.
About five weeks prior to returning the car; you should begin your preparations, fixing any damage, including cracked windscreens. Gather together all the keys and documentation that came with the car. If you've fitted any non-standard equipment (which should only be done with permission) it should be removed before returning the car.
Lease Problems
If there's damage or any other problem with your car which is due to a manufacturing or design fault, then this issue is between you and the dealership, and it's your responsibility to deal with any issue before you return the car to the lease company, and ideally at the point when you notice the fault. Manufacturing and design faults can include such things as corrosion and tarnishing of exterior trim and fittings, paint or coatings peeling or falling off.
In the event of a problem between you and the leasing company that can't be resolved, you can contact the BVRLA (if the company is a member) and fill out a complaint form on their web site. They'll write to both parties to resolve the complaint. If that doesn't work, they'll forward the relevant details to a conciliation committee. You'll hear a decision within 30 working days. Using their conciliation service doesn't preclude your right to take separate action
