Finance Types Explained
Business Contract Hire is commonly referred to as vehicle lease and allows businesses a fixed payment method for the use of a vehicle for a term of normally between 12-48 months. The payments attract VAT of which for cars 50% and for commercial vehicles 100% of the finance element is reclaimable, 100% of the VAT for any maintenance payment is reclaimable. The rental payments are also classed as a true business expense so can be wholly offset against corporation tax. The benefits are fixed monthly payments with no disposal risk, but reasonable care has to be taken of the vehicle and also there is an obligation to remain under the stated mileage at the contract inception or the finance company will levy a charge for loss of value.
Personal contract hire is commonly referred to as a vehicle lease. The vehicle is purchased by the finance company who estimates a value of the vehicle at end of the term and your monthly payment consists of the depreciation and interest. The benefits are simply no residual value risk and fixed payments, but the vehicle has to be returned in a reasonable condition and not a greater mileage than stated at contract inception or the finance company will levy a charge for this.
Finance lease allows a business to obtain a vehicle and use it for the length of the lease and beyond with sub-sequential secondary or peppercorn rentals. Payments attract VAT and rentals can be offset against corporation tax. Unlike contract hire disposal must be undertaken by the lessee of which normally 97.5% of the disposal amount can be retained.