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What is business contract hire?
Contract hire agreements are a great way for businesses to access the vehicles they need in order to grow, or take on new projects. You’ll be able to avoid large upfront payments and preserve your cash flow.
Business contract hire is a way for your company to access vehicles for a predetermined period by paying fixed monthly rental fees. Unlike other vehicle financing methods, such as hire purchase agreements, business contract hire doesn't involve vehicle ownership. Instead, it offers you the flexibility to use a vehicle day-to-day without having to worry about the responsibilities that go along with owning it.
How does business contract hire work?
With contract hire, you'll be able to hire a vehicle for a predetermined number of months or years without having to own it. You'll simply choose the car or van that your business needs and make monthly payments which are agreed in advance with your lender.
The purchase price of the vehicle and the residual value is taken into account when determining your payments. You'll pay the difference between the two, plus interest, each month.
You'll never have to worry about selling the vehicle at a reduced cost further down the line, and can even upgrade to a newer or more suitable model once your agreement ends.
What types of assets could I get using business contract hire?
Business contract hire allows you to lease a variety of assets without owning them outright. Here are common assets you could get:
Vehicles such as cars, vans and trucks
Plant and machinery
Office equipment
Commercial kitchen equipment
Medical equipment
Why use business contract hire?
Better cash flow
With fixed monthly payments, you can reduce the strain on your cash flow and invest capital into other areas of your business.
Clear and transparent pricing
Fixed term rates ensure that you'll know exactly what your monthly payments will be throughout the term of your contract hire agreement.
Budgeting and cash flow forecasting
Contract hire simplifies cash flow forecasting by eliminating uncertainties associated with depreciation, maintenance, and resale values.
Tax benefits
You can offset your monthly contract hire payments against your taxable profits, to help drive down your overall tax bill.
What are the tax implications for my business if I get a car using contract hire?
If you get a car, vehicle or other type of asset for your business using contract hire, you won't own it. However you will still be able to claim the monthly rental fees back which will help you save on your business’ Corporation Tax.
Historically, you couldn’t claim capital allowances on a leased car or vehicle, making only cars purchased outright or through hire purchase eligible for a 100% tax relief in the first year. However in the Spring Budget 2024 it was announced that full expensing would be extended to leased vehicles. Legislation is yet to be published for this, so it’s important to consult with an accountant to check the current rules and regulations that may apply.
What are the advantages and disadvantages of business contract hire?
Advantages of business contract hire
Instead of paying a large sum upfront to buy assets like vehicles or equipment, you pay smaller, regular payments. This helps you save money for other important aspects of your business.
At the end of the contract, you can easily upgrade to newer models or change your equipment to suit your evolving needs.
When you own assets, their value can go down over time (depreciation). With contract hire, you don't have to worry about this because you're only renting the assets.
Usually, the company that you lease from takes care of maintenance and repairs for you. This saves you time and hassle, as well as unexpected costs for fixing things.
In many cases, the monthly payments you make are considered a business expense, which can lower your taxable income. This means potential tax savings for your business.
Disadvantages of business contract hire
While monthly payments might seem lower than buying, over the long term, you might end up paying more for contract hire than you would if you bought the assets outright.
Breaking a contract hire agreement early can be expensive. If your business needs to change suddenly, you might find it difficult or costly to end the lease before it's up.
Contract hire agreements often come with restrictions on how many miles you can drive vehicles. If you exceed these limits, you could face extra charges.
You don't own the assets you're renting, which means you can't sell them if you no longer need them.
You're responsible for returning the assets in good condition. If there's excessive wear and tear, you might have to pay extra charges at the end of the term.
Is business contract hire right for your business?
While business contract hire offers several advantages, you might want to consider other financing options to see which aligns best with your business.
Here are some alternative ways you can fund the purchase of a vehicle or asset:
Operating lease: similar to contract hire, an operating lease allows your business to use assets without ownership responsibilities. However, operating leases often have shorter terms and may include additional services like maintenance and insurance.
Finance lease: a finance lease typically involves longer contract terms than business contract hire and provides the option to purchase the asset at the end of the agreement for a predetermined price. This option suits businesses looking for eventual ownership without a significant upfront investment.
Hire purchase: with a hire purchase agreement, your business will make fixed monthly payments towards owning the asset outright. While this option offers ownership at the end of the term, it requires a larger initial deposit and may include interest charges.
Asset finance: asset finance encompasses various options tailored to different assets, such as equipment loans, or refinancing. This flexibility allows your business to secure funding for essential assets while preserving cash flow.
Business loan: opting for a traditional business loan will provide you with upfront capital to purchase assets outright. While this option offers ownership from the start, your business will bear the responsibility of maintenance, depreciation, and eventual disposal.
Business contract hire for electric cars
If you’re looking for a vehicle with lower emissions and reduced running costs, you might be considering getting an electric company car.
There are a number of specialist lenders available in the UK business finance market that can provide you with contract hire agreements to fund your vehicle or asset purchase.
You can use Capitalise to find, compare and apply for contract hire agreements with multiple lenders, all in one application. When you search for funding with Capitalise, you’ll receive support from a dedicated funding specialist who will work closely with you to understand your business needs and help you find a business contract hire provider that works best for you. Simply sign up for free to get started.
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Business contract hire and personal contract hire are both types of finance for leasing vehicles. However they differ in terms of who can use them and their terms and conditions.
Here’s a breakdown of the differences between the two:
Business contract hire:
Designed for businesses.
The contract hire agreement is between the business and the leasing company.
The primary user of the vehicle is typically an employee of the company, and the vehicle is used only for business purposes.
Tax can usually be claimed back by the business, depending on the type of vehicle and its use.
Personal contract hire:
Personal contract hire is aimed at individuals who want to lease a vehicle for personal use.
The contract hire agreement is between the individual and the leasing company.
The vehicle is used for personal transportation rather than business purposes.
Tax can’t usually be claimed back by the individual because the vehicle is for personal use.
Finance leasing and contract hire differ mainly in their ownership and payment structure. With a finance lease, you can gain ownership of the vehicle at the end of the lease, as you pay for its full cost spread over the term. Or, in a finance lease, you could pay lower monthly repayments and pay the residual value at the end of the term (also known as a balloon payment)/ This means that in a finance lease, the business will likely retain ownership of the vehicle.
On the other hand, contract hire involves fixed monthly payments without ownership of the vehicle at the end, as the leasing company retains ownership throughout.
Yes, you can get business contract hire on a used car. Many lenders will offer contract hire for both new and used vehicles. However, the availability and terms may vary depending on the specific vehicle you're interested in.
The key difference between business contract hire and hire purchase is the ownership of the vehicle. You won’t retain ownership of the vehicle in a contract hire agreement, instead you’lll make monthly payments to lease it. Whereas in a hire purchase agreement, your business will own the vehicle. You’ll be responsible for all maintenance costs in a hire purchase agreement, but you’ll also have more flexibility. For example you could customise the vehicle as you own it.
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