Business Contract Hire

Business Contract Hire

Contract hire is a term used in the UK to describe a longer term (usually 2 years) RENTAL of a vehicle. There is a considerable industry - the contract hire and leasing sector - in the UK, with the largest current player being LEX - a wholly owned subsidiary of the Halifax Bank of Scotland, that runs in excess of 275,000 vehicles. The UK industry is arguably the most successful and best managed (and served) of all, worldwide, largely driven by the UK's tendency for company funded vehicles for business - or perks.

The industry has a representative body - the British Vehicle Rental and Leasing Association (BVRLA) - which seeks to look after the interests of, and sets standards for operational quality for, both the contract hire and leasing sectors and the daily hire (car rental) sectors. BVRLA's membership has close to 2 million vehicles under management in the UK, and their activities also include lobbying MPs in respect of any fiscal matter which may affect the industry. There are 50 significant companies operating this type of supply, with possibly another hundred with fleets under 1,000 vehicles. The fleet statistics for these companies are researched and published annually by Fleet News - an industry weekly publication from publishers EMAP.

Apart from the major players who concentrate mainly on corporate fleets and affinity car schemes, a significant independent broker channel has emerged estimated at 3,500 companies, supplying in excess of 300,000 vehicles per annum, mainly to small and medium enterprises (SMEs) and new start companies. Brokers exist as aggregators and attract fee income based on arbitrage. By finding the lowest-cost leasing supplier for a particular make and model, adding a margin (which is capitalised and added to the customer rental)many operate from SOHO to keep overheads low they can maintain reasonable income as sole traders while providing an efficient local service to small businesses. However a new contract hire price comparison site has been launched to help SMEs and private individuals find prices instantly. 85% of automotive purchases are now researched on-line (Source: Automotive Management) and this figure is likely to grow. These companies rent vehicles to business users, normally including a maintenance and repair plan for the period of the user's choice. The vehicle remains the property of the lessor (contract hire company) and never becomes the property of the lessee (the company renting and using the vehicle).

Contract hire is a very popular choice for VAT registered companies with more than 40% choosing this funding method (Fleet Week). Tax advantages and reduced administration help businesses to budget more accurately for their vehicle requirements. Contract hire is available to sole traders, partnerships and limited companies.

Personal contract hire, for private individuals, is also growing. Last year the FLA (Finance and Leasing Association) reported a 10% increase in personal leasing.

The Main Advantages of Contract Hire are as follows:

Finance / Taxation Benefits

*Accurate monthly budgeting
*Off balance sheet
*Improved cash flow
*Minimum capital expenditure
*Protect your capital budgets
*Fixed interest rates
*Rentals allowable against taxable income, subject to the 'half the excess rule' partial disallowance
*VAT recoverable on monthly rentals*
*No depreciation risks as the responsibility for disposal of the vehicle rests with the leasing company.

The tax rules surrounding vehicle leasing are currently the subject of a UK government review, and may change soon.

* Only 50% of the VAT relating to the finance element is recoverable if car has private usage. 100% if business only. On contracts with maintenance the service element VAT is recoverable.

*From April 2009, carbon emissions of company cars will impact the tax relief available for businesses as well as the tax charge on the individual.
*This will replace the current sliding scale system and will move to a new 15% restriction for contract-hired cars with CO2 emissions over 160g/km.

The main disadvantage of contract hire is the cost to terminate the contract early. The cost can be as much as 100% of the outstanding rentals but more often 50%. As a result, new services offering to enable lease transfers and contract novations have emerged.

Vehicle Running Benefits

*No vehicle disposal problems
*Reduced administration
*On-going advice and support
*Road Fund Licence provided (vehicle excise duty paid) for duration of contract
*Optional maintenance package
*Optional breakdown rescue cover
*Optional replacement vehicle cover in event of breakdown
*Optional GAP insurance*

*GAP insurance (loan/lease payoff coverage) provides cover for the shortfall between the outstanding finance and the insurance value if the vehicle is declared a write-off by your insurance company.

ee also

*Hire purchase
*Closed-end leasing
*Installment plan
*Chattel mortgage

External links

* [ BVRLA (British Vehicle Renting and Leasing Association]
* [ Aston Financial Car Lease (UK Based Contract Hire Broker]

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