Contract hire
What is it?
Contract hire sees the user hire a van for a set period of time and pre-determined mileage at fixed monthly rentals. There is no option to purchase the vehicle and at the end of the contract it is returned to the leasing company.
The monthly rental or lease rate usually takes into account the cost of the van including vehicle registration fees, road fund licence, its period of use and agreed mileage, funding costs and forecast residual value (the van’s estimated value at the end of the contract, taking into account depreciation, mileage and condition). This part of the monthly charge is often referred to as the ‘finance’ element of the rental.
Vehicle mileage will have a big impact on the lease rate because the number of miles a van does has major implications for both its service requirements and resale value.
Underestimating your mileage can reduce the monthly rental rate, but it can result in you incurring excess charges at the end of the contract if you exceed the agreed total mileage limit.
You can also include a ‘service’ element in the rental if you want. This covers a range of additional services such as maintenance, replacement vehicles, roadside assistance, insurance, accident management, replacement tyres and fuel cards.
Benefits
- You won’t have huge amounts of cash tied up in your vans, so will have more to invest in making your business a succes
- Your motoring costs will be fixed
- 100% VAT is reclaimable if the vans are only used for business purposes
- Payments are usually Corporation Tax deductible
Drawbacks
- You’ll have to keep the van for the exact time you have agreed or face heavy termination penalties
- If you go over the agreed mileage you’ll have to cough up for each extra mile travelled
- If you damage your van during the contract period, you’ll get a bill for refurbishment when you hand it back if you don’t do it before the end of the contract
- There is no option to buy the van at the end of the contract period
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