Car contract hire - some important questions answered

23rd December 2019


We know it can be confusing! You’re thinking about car contract hire but aren’t sure if it’s for you and would like to learn more. 


It’s always as well to seek out the BEST ADVICE and - after you have consulted with your accountant - our team are always ready, willing and able to answer any questions you may have in helping you come to the best solutions to suit your needs. 


We have put together answers to five often-asked questions about car contract hire - we hope it helps!


How does car contract hire work?


Contract hire is the main type of vehicle leasing. It doesn’t come with an option to buy the vehicle which is returned to the leasing firm at the end of the contract. The vehicle is hired at fixed monthly fees, over a set period and predetermined maximum mileage.


The monthly rate takes into account:


  • Cost of the car

  • Vehicle registration fees

  • Road tax

  • Period of use

  • Agreed mileage

  • Funding costs

  • Vehicle’s estimated value at end of contract


The choice of vehicle can be a major factor, while wrongly estimating mileage can have serious implications in excess charges incurred. The hire agreements could include a ‘service’ element or rental which can cover services including replacement vehicles, roadside assistance, maintenance, fuel cards and accident management.


Car leasing or hire purchase?


There is no right or wrong way to finance a vehicle but a good broker or dealer will suggest the right product taking into account things like is the client funding the vehicle through a business personally and do they want to own the vehicle at the end of the contract.


We have an easy to use tool on our website where a few simple questions will highlight some of the suitable finance products for you. There are also options under the finance tab which may help avoid coming unstuck at the end of an agreement in terms of mileage allowance or large final payments.


Does contract car hire include insurance?


Normally no for car contract hire or lease. Short-term car hire is a different product and often has the option for insurance which means you would pay a bit more.


Is car contract hire tax deductible?


For a business, in short, yes. But there is a bit more to it and we would always advise you to seek advice from your accountant. Things to consider include: 50% of VAT on business monthly rentals can be reclaimed - 100% for commercial vehicles and 100% on the maintenance element if you opt for a fully maintained contract.


A business customer can recover 50% of the VAT on monthly rental if there is any private use of the vehicle. Where there is no private use then 100% of the VAT can be recovered by a business customer.


VAT recovery is limited to 50% on the finance element of the rental charge. It does not apply to any services rendered under a contract hire agreement, such as maintenance for which VAT is fully recoverable by a business customer subject to normal exemption rules, 100% for commercial vehicles.


We would always advise you consider the emissions of the vehicle you’re considering, whether that be through renting or buying through a business. For more detailed information, give us a call and we will talk it through with you.


What is Benefit in Kind (BIK)?


Sometimes called perks and benefits, BIK are benefits not included in wages and include things like company cars. But it needs some serious thought  if running a business as selecting the wrong vehicle may result in paying more tax.


Tax is payable on a company car if it’s available for private use. The tax charge is lower for cheaper cars, cars with lower emissions and cars running on alternative fuels. Cars are not taxable if they are used for business use only.


For more information about anything to do with car contract hire, give us a call on 03332 220065.


What is the best funding option for me?