Contract Hire Jargon Explained
What it is in plain English
Contract hire is a long-term vehicle rental agreement where you pay a fixed monthly fee to use a van without ever owning it. You are leasing the vehicle for a set period and mileage allowance, returning it to the finance company at the end of the term.
How it works step by step
Lease agreements often use specific notation for terms. A '3+35' payment profile, for example, means you pay three months' rental upfront followed by 35 monthly payments. The 'residual value' is the estimated worth of the van at the end of the contract, which dictates your monthly costs. Unlike hire purchase, there is no final 'balloon payment' or option to own the vehicle; you simply hand it back.
What you pay and what is included
Quotes often list a 'P11D value', which is the manufacturer list price plus VAT and delivery, used for tax calculations. Your contract will specify if it is 'maintenance inclusive' or 'exclusive'; the former bundles servicing and repairs into your monthly fee, while the latter means you cover these costs yourself. 'Road fund licence' is usually included for the duration of the agreement, but you must arrange your own commercial insurance.
Who it suits and who it does not
This is suitable for businesses looking to fix costs and avoid depreciation risks. It is less appropriate if you prefer to hold assets on your balance sheet or if you expect your mileage to be unpredictable, as 'excess mileage' charges apply if you exceed your agreed limit upon returning the vehicle. Always check the 'fair wear and tear' guidelines, as damage beyond this standard will lead to penalty charges.
Questions to ask before you sign
Clarify how your 'VAT treatment' affects your business accounting, especially if you are not VAT registered. Ask specifically whether the contract is 'maintenance inclusive' so you know who covers the cost of tyres and servicing. Finally, confirm the exact pence-per-mile rate for excess mileage to understand your potential liabilities before signing.
FAQs
What is a 3+35 or 6+47 profile? This notation describes your payment schedule. The first number is the initial rental paid upfront, and the second number is the remaining monthly instalments. For example, 3+35 means three months paid initially followed by 35 monthly payments.
What is the P11D value? The P11D value is the official list price of the van including VAT, delivery charges, and any fitted extras. It is primarily used to calculate the benefit-in-kind tax for employees who use the vehicle for private purposes.
What is the difference between maintenance inclusive and exclusive? A maintenance inclusive contract includes the cost of routine servicing, repairs, and often tyres within your monthly rental fee. A maintenance exclusive contract means you are responsible for paying for all servicing, MOTs, and repairs throughout the life of the lease.
What are excess mileage charges? If you drive further than the total agreed mileage set out in your contract, you will be charged an additional fee for every mile over the limit. This rate is set at the start of your agreement and is calculated on a pence-per-mile basis.
What is fair wear and tear? This refers to the standard condition the vehicle is expected to be in when returned. It covers minor chips or scuffs consistent with normal use. Damage exceeding these guidelines is considered 'damage' and will result in additional repair costs at the end of the contract.
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