Contract hire is a finance solution available to sole traders, partnerships, limited companies and more recently private individuals. It is a very popular choice for VAT registered companies as it enables them to claim back 100% of the VAT on the finance element (50% if the vehicle is to be used for both business and private use). It also allows the company to focus on their core business activities whilst avoiding the financial risk and administrative burden of owning their vehicle fleet. As a fixed cost, off balance sheet form of finance, contract hire’s popularity has remained high due to the ease of vehicle provision it offers, the removal of maintenance and residual risk and the overall peace of mind and ease of budgeting. Personal Contract Hire (also known as personal leasing) is a long-term rental agreement. It is a solution for private individuals and is becoming more and more popular amongst car users. The private individual makes monthly rental payments for the car and at the end of the contract simply returns the car without any further obligations.
Finance Lease is a tax efficient option where you choose to pay either the entire cost of the vehicle, including interest charges, over an agreed lease period or opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle. At the end of the agreement, the relevant assets are sold and you receive the major share of the proceeds. As the asset owner, the leasing company claims the available writing-down allowances and reflect this in your monthly payments. In a nut shell, Finance Lease offers the same fixed cost solution to contract hire, in that the finance payments are monthly and a fixed cost maintenance contract can be included. However, unlike contract hire this is an on balance sheet car leasing option. VAT is still recoverable for qualifying companies; however the risk of ownership remains with the hirer NOT the leasing company.
Lease Purchase is sometimes referred to as Hire Purchase with a balloon and is structured in a similar way to Personal Contract Purchase (PCP). The customer normally benefits from a slightly lower finance rate with a Lease Purchase product as there are no guarantee’s offered at the end of the agreement. The deferred capital lump sum amount at the end of the agreement is known as the Residual Value (RV), and has to be paid by the customer for outright ownership at the end of the contract.
Personal Contract Purchase
A personal contract purchase (PCP) requires the customer to pay a certain amount for a set contract period normally between 24 & 48 months with the right to drive the vehicle while ownership is retained by the finance company. This is similar to contract hire; however in this case the customer has the right to ultimately acquire the vehicle for a previously agreed total cost called a minimum guaranteed future value (MGFV). Alternatively the customer can arrange to return the vehicle without any further liability past the end of the contract (subject to mileage and condition).
Hire purchase is one of the most commonly used methods of funding by private individuals and businesses (including limited companies, partnerships and sole traders) to fund the purchase of cars and commercial vehicles along with other business equipment. The customer normally pays a deposit which is deducted from the balance to be financed. The remaining balance is then spread over a period (normally between 12 and 60 months) with additional interest calculated on top. At the end of the agreement the customer then owns the vehicle outright.