Contract Hire for Limited Companies
What it is in plain English
Contract Hire is a business-only vehicle leasing arrangement designed for Limited Companies. You pay a fixed monthly rental to use a van for a specific term and mileage, without ever owning the vehicle. As you do not take title to the asset, the van is returned to the finance provider at the end of the contract.
How it works step by step
You select the commercial vehicle and agree on a term length and annual mileage limit. Following a successful credit application, you pay an initial rental, followed by regular monthly payments. Unlike Sole Trader agreements, these contracts are underwritten in the name of the Limited Company. At the end of the contract, the vehicle is returned to the finance provider, subject to fair wear and tear standards.
What you pay and what is included
Monthly rentals cover the use of the vehicle and the Road Fund Licence for the term. For VAT-registered Limited Companies, you may be able to reclaim a proportion of the VAT on the monthly rental payments for commercial vehicles, provided the van is used exclusively for business purposes. Maintenance packages can be added as an optional service for an additional monthly fee. You must provide your own fully comprehensive insurance and manage fuel costs.
Who it suits and who it does not
This is suitable for Limited Companies that wish to avoid the depreciation risks associated with vehicle ownership and prefer fixed monthly overheads for budget management. It differs from Hire Purchase, where ownership passes to the company at the end of the term. If you require long-term asset ownership, Hire Purchase may be more appropriate. Contract Hire is less suitable if you cannot accurately predict your annual mileage, as excess mileage charges will apply if you exceed your agreed limit.
Questions to ask before you sign
Ensure you confirm the total annual mileage allowance to avoid potential excess mileage penalties. Clarify if the vehicle requires any specific service intervals, especially if you have opted for a maintenance package. Check the documentation regarding early termination, as most finance providers do not offer this flexibility without significant financial penalties. It is essential to discuss the accounting treatment of the lease with your accountant, as IFRS 16 or FRS 102 standards may require you to recognise the lease asset and liability on your balance sheet.
FAQs
How does contract hire work for a limited company? Contract Hire allows your Limited Company to lease a van for a fixed period. You pay a monthly rental, and the vehicle is returned to the finance provider at the end of the agreement. You never own the asset.
Are there tax benefits for limited companies using contract hire? For many Limited Companies, monthly rental payments can be offset against taxable profits. If you are VAT-registered, you may be able to recover a portion of the VAT on commercial vehicle rentals. Please consult with your accountant regarding your specific tax position.
Can I change my mileage limit during the contract? Mileage limits are fixed at the start of the contract. While some finance providers may offer the option to amend a limit mid-contract, this is not guaranteed and often incurs administrative fees and a recalculation of your rentals. Always check the terms of your specific agreement.
What happens if the van is damaged beyond fair wear and tear? If the vehicle is returned in a condition that exceeds the standard fair wear and tear policy, the finance provider will issue a charge for the repair costs required to bring the vehicle back to an acceptable standard.
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