What is business contract hire and what are the benefits?

The Government’s high-fuel road tax regulations have added considerable costs to car fleets.

With Vehicle Excise Duty (VED) increasing year-on-year for car owners, fleet managers are weighing up potential cost savings for a business to contract hire.

Business contract hire is a way to finance buying a fleet of vehicles whilst reducing the risk of paying increased levies and the inevitable depreciation of vehicles.

Low deposits – typically 3 monthly payments – helps to safeguard your capital and invest in other areas of your business. Fixed monthly payments also reduce the impact on cash flow and help make budgeting straightforward.

What is business contract hire?

Business contract hire is a cost-effective strategy to protect capital. Companies essentially rent a car for 12-60 months (one to five years) and pay fixed monthly instalments.

Actual costs will depend on the model and engine type of the car, the length of time the contract covers, anticipated residual value and the agreed mileage allowance. Add-ons such as maintenance can also be factored into the contract.

With a reputable lending provider, you should expect a high-level motoring package that covers routine maintenance, servicing, tyres, VED and road side recovery at affordable rates. The only ongoing costs you should have to worry about is fuel and insurance.

Because the vehicle is leased, the lending provider maintains legal ownership of the car. This means you don’t have to include the costs on your balance sheet.

Once the lease has expired, the vehicle is returned to the business contract hire company. You are then free to hire another vehicle. You do not have any other financial obligations unless you exceed the contracted mileage limit or damage the vehicle.

The benefits of business contract hire

Business contract hire provides UK businesses with several benefits including the following:

• Tax breaks – contract hire vehicles means you can offset the rentals against corporation tax and you can claim back 50% of your VAT
• Save on low-carbon engines – fleet hire companies can advise and provide you with access to a wide range of vehicles with low-to-no emission fuels
• Fixed-cost motoring – you know exactly how much your fleet will cost each month enabling you to manage your finances easier and plan your financial future with confidence
• Improved cash flow – less capital investment gives you more freedom to invest in other areas of your business
• No depreciation concerns – eliminates the guesswork of estimating future residual value
• Eliminates cost uncertainty – by including maintenance and servicing cover in a business contract hire agreement, there are no disruptions to your budget when a vehicle needs repairing

The final decision as to whether business contract hire is more beneficial to your company fleet will depend on various factors. For many, contract hire is a solution that enables you to invest in core activities.

By avoiding financial uncertainty, you take fewer risks and can grow your company without over-stretching your budget or carrying an additional administrative burden.