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Van Leasing Explained

Business Contract Hire

Business Contract Hire is a contract between a business and a vehicle leasing company for the business to hire a vehicle of their choosing with an agreed contract term, annual mileage and monthly rental.

A Full Maintenance and Servicing Package can be included for a fixed monthly amount.

1) Benefits of Contract Hire:

  • Fixed monthly rental payments can help with accurate cash flow and forecasting
  • When Contract Hiring a van, assuming the standard rate of VAT applies then companies can reclaim 100% of the VAT on the monthly rentals
  • Rentals allowable against taxable profits (consult with an accountant to discuss how your lease should be treated)
  • Minimum Initial outlay
  • Small businesses can benefit from large fleet discounts reflected in their monthly rentals.
  • You like to change your van or vans regularly
  • You avoid depreciation risks
  • No need to go through the process of selling vans and purchasing new ones through a van dealer
  • You avoid the financial risks and administrative hassles of maintaining older vehicles

3) Finance Lease:

****For accounting and tax purposes many accountants will treat a Finance Lease as if the asset were owned and so depending on your commercial assets value you can offset 100% of the van cost against the companies’ taxable profit in the first year. Interest charges may also be offset against your taxable profit****.
NOTE – Please clarify this with your accountant!

Finance Lease is a contract between a business and a vehicle leasing company for the business to hire (lease) a vehicle of their choosing with an agreed contract term, fixed monthly rental and with the option of an increased final rental known as a balloon rental.

The larger final rental means lower monthly payments which can help businesses with cash flow.

With Finance Lease the financial risk and reward on the sale of the vehicle is with the customer. At the end of the lease period a business can sell the vehicle to an independent third party and retain up to 98% of the sale proceeds.

You will also have the option to extend the lease by paying an annual nominal rental which is usually equivalent to the monthly rental. This annual rental is known as a “peppercorn rental”

Benefits of Finance Lease:

  • A final payment can be included in the lease to reduce monthly rental
  • Fixed monthly retail allows accurate budgeting and cash flow forecasts
  • Low initial outlay is required with an option of just one monthly rental payable as the initial outlay
  • Assuming the standard rate of VAT, current legislation allows businesses to reclaim of 100% VAT on the rentals
  • You benefit from up to 98% of the sales proceeds when the vehicle is sold to a third party at the end of the lease. (This amount will be confirmed on the Lease document)
  • You have the flexibility of different options at the end of the lease
  • There is no actual contractual mileage restriction on a Finance Lease agreement

Note: If you have a balloon payment on a Lease Purchase agreement please make sure that it is in line with the finance companies recommended value for the mileage you will be doing or you may have negative equity at the end of the agreement.

4) Lease Purchase:

Lease Purchase is a financial agreement whereby you pay for the vehicle in monthly instalments over a fixed period of time and automatically take ownership of the vehicle at the end of the agreement. Lease Purchase is simply Hire Purchase with a balloon payment at the end you are required to pay.

Benefits of Lease Purchase:

  • Option to purchase at the end of the contract
  • Vehicle is shown as an asset on your balance sheet
  • Fixed monthly payments allows for more accurate budgeting and forecasting
  • There are writing down allowances which can be offset against your taxable profit and the interest charges may also be offset against taxable profit. (please consult with your accountant)
  • If the vehicle is well maintained and has a good residual value then you should have equity at the end of the agreement

Note: If you have a balloon payment on a Lease Purchase agreement please make sure that it is in line with the finance companies recommended value for the mileage you will be doing or you may have negative equity at the end of the agreement.

5) Contract Purchase:

A Contract Purchase is effectively the same as a Hire Purchase agreement but with a guaranteed balloon payment at the end. The customer has the option at the end to either pay the balloon payment and own the vehicle, handing it back or trading it into a dealer. Full maintenance and servicing package can often be included for a fixed monthly amount which will depend on the vehicle and contract terms such as mileage and length of contract.

Benefits of Contract Purchase:

  • Fixed monthly rental payments can help with accurate budgeting
  • If you choose not to purchase at the end of your contract, any depreciation is not your responsibility
  • Fixed monthly payments

Considerations with Contract Purchase:

  • Sometimes the full fleet discounts that are available on Contract Hire deals are not available for Contract Purchase
  • Potential additional costs if you exceed the total contract mileage. Note that you will have been quoted an exact excess mileage amount on the Contract Hire agreement
  • You may be charged for any damage over and above the leasing provider fair wear and tear guidelines

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