POST-RECESSION, contract hire is a very popular way to fund company cars and vans as SMEs and small businesses try to fix the cost of their motoring and avoid any unexpected bills. Low monthly payments are part of that equation.
Finance lease on the other can offer advantages over and above contract hire in many cases for van users, many of which are particularly beneficial for business van acquisition.
What is contract hire?
Contract hire is a fixed term contract, where the monthly lease amount is calculated by forecast depreciation; this is based on the estimated annual mileage and, of course, the vehicle itself.
Contract hire is an off-balance sheet form of funding, and the VAT is 50% reclaimable on the rentals if there is an element of personal use (100% on commercial vehicles regardless of activity). In addition, rentals are normally 100% corporation tax deductible.
What is finance lease?
With finance lease the risk is with the lessee. But the lessee never owns the vehicle. Therefore the accounting method is very different from contract hire. This is on book, and must be accounted as an asset. With a finance lease an estimated residual value is agreed upon which repayments are agreed with a balloon at the end. If the van’s residual value is more than the agreed residual value, the lessee pockets the extra; less and the lessee has to pay out.
Although there is an element of risk, the residuals are calculated in the same way as contract hire, by using forecast depreciation based on mileage.
With this in mind, there is very often equity at the end of the term and towards the end of the term, it is sometimes possible to “buy out” of the contract early, meaning that finance lease offers more flexibility than contract hire.
Finance lease agreements are an on-balance sheet form of funding and many suppliers provide full maintenance deals with their packages.