Business Contract Hire Explained

What it is in plain English

Business contract hire is a long-term vehicle leasing agreement where a company pays a fixed monthly fee to use a van for a set period without ever owning the vehicle. It allows your business to access the latest models while shifting the burden of depreciation and disposal risk onto the leasing company, providing a simple way to manage your fleet costs.

How it works step by step

The process begins by selecting your desired van and agreeing on a contract term, typically lasting between two and five years. You also define an annual mileage limit based on your expected business usage. Once the agreement is signed and your initial rental is paid, you receive the vehicle and make fixed monthly payments for the duration of the term.

As the contract concludes, you simply return the van to the finance provider. Because you are only paying for the depreciation of the vehicle during your usage period, there is no option to purchase the van at the end of the term. This makes it an ideal solution for businesses that want to refresh their fleet regularly.

What you pay and what is included

Your monthly payments are calculated based on the difference between the vehicle's original cost and its projected residual value at the end of the contract. In addition to the rental cost, you may choose to bundle maintenance packages into your agreement, which covers routine servicing, tyres, and mechanical repairs, effectively fixing your fleet maintenance budget.

It is important to note that you are responsible for keeping the van in good condition. Excessive wear and tear or exceeding your agreed mileage limit can lead to additional charges when the vehicle is returned. Insurance and fuel costs remain your responsibility unless otherwise specified in your specific service plan.

Who it suits and who it does not

This method is perfect for VAT-registered businesses that want to reclaim a portion of the VAT on their rentals and avoid the administrative hassle of selling used vans. It suits companies that prefer predictable monthly outgoings and want to ensure their drivers are always using modern, reliable, and fuel-efficient vehicles that reflect a professional image.

Conversely, it may not be suitable if you want to own the asset as part of your company balance sheet or if your mileage patterns are highly unpredictable. If you tend to keep your vehicles for ten years or customise them extensively with permanent fixtures, other finance methods might offer more flexibility than a standard lease.

Questions to ask before you sign

Before committing to a contract, clarify whether maintenance is included or if you need to manage servicing yourself. Ask about the specific "fair wear and tear" policy to understand exactly what condition the van needs to be in upon return. Furthermore, enquire about the process for adjusting your mileage allowance mid-contract if your business needs change significantly.

FAQs

What is business contract hire and how does it work for a company? Business contract hire is a leasing arrangement where your company pays a fixed monthly fee to use a van for a set term. You return the vehicle at the end of the agreement, meaning you never own it but benefit from lower monthly costs and the ability to upgrade your fleet frequently.

Can I reclaim VAT on business contract hire payments? Yes, if your business is VAT-registered, you can typically reclaim 50% of the VAT on the finance element and up to 100% of the VAT on any optional maintenance packages included in the contract.

What happens if I go over my agreed mileage? If you exceed your pre-agreed annual mileage, you will be charged an excess mileage fee for every mile over the limit. This rate is set out in your contract, so it is important to estimate your usage as accurately as possible.

Do I have to pay for servicing and repairs? Maintenance is optional. You can choose to include a maintenance package that covers servicing and wear-and-tear items, or you can choose to handle these costs independently as and when they arise.

contracthire.tv is a trading name of Swiss Vans Ltd, authorised and regulated by the Financial Conduct Authority (FRN 668283) as a credit broker, not a lender.