What is Contract Hire and what are the benefits?
There are a number of variety of leasing, but Contract Hire is the most dominant type used in the UK. The benefits of which are:
1. Fixed Monthly Costs
Contract Hire is a fixed-cost form of motoring. For a set monthly payment, you get the use of the vehicle for an agreed duration (the most popular being 24, 36 and 48 months) and mileage that suits your business. The monthly payment takes into account the vehicle's price at point of hire, the forecasted mileage during the contract and its estimated residual at the end. Providing the mileage is not exceeded ( although there are pence per mile excess milages charges in place, in the event that this happens ) and the vehicle is returned in a fair condition, you can simply just return the vehicle at the end of the contract, with no further cost. You can find links to the Fear Wear and Tear Guide here
. For an additional monthly fee, you can also ask your leasing company for full maintenance cover (servicing and tyres), just servicing cover or just roadside assist/replacement vehicles. Road Fund License is always
included for the term of the contract.
2. No Risk
Most vehicles will lose value from the moment they leave the showroom and begin accuring mileage. In a contract hire deal, you simply return the vehicle at the end of the contract period, and they take the residual value risk. If you include packages such as maintenance and services, you are also protected from any unseen rise in these costs.
3. Free up Capital
By leasing a vehicle rather than purchasing it means that you are not tying up capital in a rapidly depreciating asset. You can invest the money that you are not paying up front into growing your business or reducin debts.
4. Claiming VAT
VAT is 100% reclaimable on the cost of a vehicle which is solely used for business, regardless of whether you buy it or contract hire it. However the situation is different if it is used privately. While a Contract Hire customer can still reclaim 50% of the VAT charged on the finance cost of such a vehicle, the purchase can reclaim zero VAT. Another benefit is that the finance company that owns the vehicle can reclaim the VAT on it ( because they are solely using it for business ) and pass this on in the form of a reduced rental rate.
5. Off balance sheet funding
Vehicle leases do not have to be shown on a balance sheet, which will improve a company's liquidity ratio, gearing and return on assets.
6. Purchasing Power
While your business may have a fleet of 10, 50 or even a few hunded vehicles, leasing companies are used to buying thousands a year. They can as a result, negotiate great deals with manufacturers and pass on the savings in the form of a competitive leasing rate.
As an alternative to Contract Hire, this product is ideal for companies who would like a high value vehicle and have the option to purchase the vehicle at the end of the contract but do not want any depreciation risks. Contract Purchase offers the customer many of the "no-risk" advantages of Contract Hire, as well as the option of service and maintenance packages. It also allows the customer the option to purchase the vehicle at the end of the agreement at a guaranteed price.
Road Fund License is still provided for the full term of the contract and the vehicle will remain registered in the leasing company's name.
How do it work? What happens at the end of the contract?
At the start of the agreement the finance company sets the final payment under the contract. This gives the customer a number of options at the end of the contract.
1. Hand the vehicle back - The customer simply arranges for the leasing company to collect the vehicle at no further cost, providing no excess mileages charges apply and the vehicle is returned within the Fair Wear and Tear Guidelines.
2. The customer may chose to pay the option to purchase fee and the final rental - the leasing company will transfer ownership of the vehicle to the customer. The customer may sell it for use as a deposit for their new vehicle.
3. Re-finance the final rental - subject to credit - 28 days notice is required prior to contract expiry date. The customer can then chose to lease the vehicle for longer, at a newly calculated rental based on the guaranteed future value.
4. Keep the vehicle for a further 12 months once the contract has expired, paying the rentals on a sliding scale of the balloon amount. The vehicle is then non-returnable after this period commences.
What are the financial benefits of Contract Purchase?
a.) VAT recoverability - The payments for depreciation and interest are NOT subject to VAT.
b.) Tax Allowances - Contract Purchase arrangements are treated for tax purposes as a purchase by the customer where the vehicle is bought into use. As a result the 25% writing down allowance is claimed by the customer (maximum of £3000 per annum).
Personal Contract Hire
Individual vehicle hire contracts
This funding method is basically Contract Hire for the private individual. It is known by most individuals as "leasing a car". The customer whilst not owning the vehicle, benefits from the leasing company's buying power to drive down the cost of the monthly rental.
Key benefits to a private individual over purchasing:
1. The leasing company's buying power will be based on annual volume commitments to manufacturer. If the individal were to purchase through a dealership, they would only be gaining the discount for taking 1 vehicle, as opposed to thousands
2. Fixed monthly rentals that can include additional services, such as maintenance, meaning that there will be no cashflow fluctuations
3. None of the depreciation risks associated with ownership
4. Convenience of an optional fully maintained vehicle with a Driver Services telephone number, with a free service booking facility
5. Road Fund License is included for the duration of the contract
Is Personal Contract Hire subject to VAT?
Yes VAT is charged but un-claimable by the individual.
What is the initial outlay?
Most finance company's request a minimum of 3 advance rentals in Month 1. This ensures the customer with a low cash outlay to enter into this type of contract.
What Payment Options does a customer have with Personal Contract Hire?
1. Spread Rentals - this is the "normal" payment profile in today's market and the most commonly requested. All rentals on the Gateway2Lease website will be based on a spread rental basis. Should a customer take a 36 Month Contract, they will pay 3 initial rental in advance followed by 35 subsequent monthly payments and the contract ends on month 36, so basically the 3 rentals in advance, then reduces the overal balance payable and this is "spread" over the remaining number of months i.e. 35 out of the 36.
2. Terminal pause - Should a customer take a 36 month contract, they will pay the 3 monthly rentals in advance, followed by only 33 monthly payments rather than 35 in a spread profile. There are then 2 months left at the end of the contract where are no rentals are due. The monthly rental would work out dearer than a spread profile.
3. Enhanced Deposit - This is often used in the event that a customer has sold a previously owned vehicle and has a larger amount free to put down into the lease. Should a customer take a 36 month contract, they would pay 1 rental ( should be no less than an equivalent 3 rentals ) in advance followed by 35 monthly rentals. The overall balance would decrease as a result of putting a larger amount down.
What services are available on a maintenance agreement for Personal Contract Hire?
Within a full maintained package, the customer would receive servicing cover, routine maintenance, unlimited tyre cover, exhaust and battery cover and a relief vehicle option ( with fully maintained contracts only ) and also breakdown assistance.
Items that are excluded are only glass and damaged items.
Arranging servicing is easy - a DriverLine telephone service is provided where your customer can call to arrange the following:
- Service bookings with FREE collection and delivery including, 'wash and vac'
- Breakdown and recovery services
- Tyre replacement service with mobile fitting available FREE of charge
- MOT booking facility
- Foreign document travel and advice
- Reflief Vehicle ( maintenance contracts only )
Simply call Driverline on 0844 493 7644
one call and all your maintenance requirements will be taken care of leaving you with hassel free administration.
The leasing company do not include insurance within monthly rentals. It is the customer's responsibility to insure the vehicle. Gateway2Lease have preferred suppliers of insurance so please contract a member of our sales team for further information. GAP insurance quotations also available via Gateway2Lease. For more information on Gap Insurance please click the link below.
Gap Insurance from Gateway2Lease
" The Pure, Tax efficient Facility "
Finance Lease is a popular option for commercial vehicles where Contract Hire is not suitable ( cars can also be financed as well ).
It 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.
The vehicle is registered in the Lessor's name initially.
Road Fund Licence afte the first year is a cost which re-invoiced to the customer, the vehicle reamins in the name of Leaseplan.
How does the balloon payment work?
This very much depends on the setup of the agreement if you have opted to have a final rental payment or not. If a final rental has been setup this will become due and payable upon expiry of your contract. Should you wish to re-finance the final rental the leasing company requires a minimum 28 days notice prior to expiry of the contract original term.
All rentals are subject to VAT and as such should government legislation change, i.e. VAT rate currently 20%, these changes would be passed onto the customer.
Customers are able to claim 50% of the VAT on cars & 100% on commercial vehicles (subject to being VAT registered).
Key customer benefits
- The leasing companies buying power helps the customer benefit from low monthly rentals
- Monthly rentals can be lowered further through the introduction of a balloon payment at the end of the contract. This can be set at a value equivalent to a forecasted residual value or reduced in line with anticipated wear and tear on the used value
- Although the customer does not own the vehicle they receive 98% of the sale proceeds. Where a balloon has been introduced, these proceeds are utilised to help clear the rental
- Available option to re-finance the balloon payment over a longer period of time
Personal Contract Purchase / "Drivewise"
Available on cars only
One of two funding methods which Gateway2Lease offers for private individuals who may wish to opt out of a company car scheme or would like a car for private use. Drivewise also gives the customer the benefits of leasing a vehicle along with the option to own it if they so desire.
Drivewise enables customers to upgrade to vehicles that might otherwise be unaffordable.
A guaranteed residual value is set by Network at the start of the contract, which gives the customer a number of options by the end, some of which are:
1. Part-exchange the vehicle and use the equity as a deposit for the next vehicle
2. Keep the vehicle by paying the outstanding residual value
3. Keep the vehicle and re-finance the outstanding value over a longer period of time
4. Hand the vehicle back to the leasing company and end the contract
Key customer benefits:
The customer can trade up to an otherwise unaffordable vehicle (e.g. an executive/ sports car)
Hassle-free and cost-effective way to finance a vehicle
The convenience of an optional full maintenance service, at a fixed monthly cost, is available.