CONTRACT hire is a long-term rental agreement of 24-60 months which provides you with the use of a van. If you want you can also add maintenance to the contract hire agreement for total peace of mind. And ease of budgeting.
Contract hire – the low down
- Easy to understand, easy to budget
- You pay a monthly rental to use a van over a set period of months and a predetermined mileage
- No vehicle disposal problems – at the end of the rental period hand the van back
- Tax and VAT-efficient
- Reduced administration
- Optional replacement vehicle cover in case your van breaks down.
- You will never own the vehicle and there is no option to buy
- Early termination can be expensive
- If your van does more miles than agreed in the contract you will be charged excess mileage
- When you return the van there are conditions about the state of the van called fair wear and tear – make sure you understand what these are
- For ‘dirty’ trades, finance lease might be more appropriate
You might find that some finance companies refer to contract hire as an Operating Lease. But it’s the same thing.
Contract hire is becoming increasingly popular. There are good reasons for this. It’s popular with VAT registered companies as they can claim back 100% of the VAT on the finance element for commercials (subject to no private use, no exempt turnover and not being on the Flat Rate VAT Scheme).
Without maintenance schemes are cheaper on the face of it, but don’t forget you are going to have to pay for all the servicing and repair costs.
If you include maintenance in the package the VAT on the service element is 100% recoverable.
As long as there is no private element, all rentals are tax deductible, making contract hire very tax and VAT efficient.
Contract hire is very straightforward: you decide on the van you want, the length of time you want it, and how many miles a year you will cover.
You simply pay an initial deposit of around three months rental and then a fixed monthly fee. You might see the contract hire offer written out like this:
- 3 + 36/30,000 miles
This is known as a ‘profile’, and simply means you pay a three month deposit up front, followed by 36 monthly payments. The total mileage is 30,000 miles (ie 10,000 miles a year on average).
Contract hire is generally ‘off balance sheet funding’ which means it can improve your gearing ratio (assets to borrowing ratio) and therefore possibly your borrowing ability in the future. With contract hire you never own the van.
Contract hire case study
HEALTHCARE provider NRS was using rented vans until 2011, when it purchased its first Mercedes-Benz Sprinters. Today, the Midlands-based company runs a fleet of 294 Mercedes vans all on contract hire agreements. And all with maintenance packages.
Latest additions to the line-up are 25 front-wheel drive New Vito 111 CDI Longs, which were supplied by Northside Truck & Van. The dealer has also delivered 110 Long and Medium Sprinters recently, and will soon hand over the operator’s first two Citan small vans.
NRS is a market-leading supplier and provider of community equipment services, and rehabilitation and care equipment, items which help improve the quality of life for thousands of people with mobility and other health care needs.
Fleet manager Alison Owen explained:
“The Vito vans are used by engineers who carry out repair and maintenance contract work on items of equipment we’ve supplied, so they are loaded with tools and stocks of spare parts. The Vito has plenty of space for this purpose; it’s also very comfortable and refined to drive, and looks great too.”
NRS uses its Sprinters to deliver and collect pieces of equipment to and from private dwellings and care homes. These vehicles carry a combination of new and used items so strict infection controls must be observed. Each therefore has two entirely separate cargo areas, a movable bulkhead allowing the size of each to be changed according to the load profile.
The smaller Citans will be run by staff from NRS’s Telecare division, whose job entails supplying, installing and maintaining home monitoring systems, including pendants which elderly or infirm customers wear around their necks and activate in cases of need or distress.
“Our vehicles are worked hard and typically cover 30-40,000 miles per year, with lots of stopping and starting,” which is why NRS has added maintenance to its contract hire agreements.
“Back-up is important,” admits Alison. “The MobiloVan comprehensive breakdown cover gives us great peace of mind while the fact that we can get our vans serviced overnight means we’re able to virtually eliminate vehicle downtime.”