UKs Motoring

Business Car Contract Hire

An agreement made between a businesses and a car dealership to hire a car or a fleet of cars to a business is termed Contract Hire. If the agreement is between an individual and a car dealership, like www.frontierleasing.co.uk it is known as Personal Contract Hire. The primary difference between the two is that Personal Contract Hire is subject to VAT and, assuming the business is VAT registered, payments made on a Contract Hire agreement are VAT exempt.

Contract Hire agreements are made for pre-defined time periods which generally range from two to four years and for pre-defined annual mileages. These agreements are not set in stone and there is generally some flexibility; for instance if agreed mileages are exceeded then there is a surcharge to pay, and generally it is possible to terminate a contract early (subject to an early termination fee) or to extend a contract.

As the costs of Contract Hire are related to the difference between the market value of the vehicle when new and its market value at the termination of the contract, it is important that the vehicle is properly maintained and is returned in good condition allowing for reasonable wear and tear. Any violation of this would result in an additional end of contract surcharge.

Contract Hire cars, unlike cars purchased by the business, do not appear on the balance sheet as an asset which can be an important advantage. Cars depreciate rapidly, so having them on the balance sheet can distort how the business might appear to investors and creditors.

There is also an overall cost advantage of hire over purchase. The costs associated with Contract Hire reflect the depreciation of the vehicle rather than its purchase price, and can differ from if you pick a Mazda or a Seat leasing deal. Also these are spread over the period of the contract with payments being made on a monthly basis. This allows accurate budgeting which is always an advantage.

Other savings associated with Contract Hire are in overheads. Staff are released from the chore of managing fleet maintenance and associated activities.