Contract Hire and Business Tax: What to Ask Your Accountant
Contract Hire and Business Tax: What to Ask Your Accountant
What it is in plain English
Contract hire is a method of funding a vehicle where the business pays for the use of the van over a fixed period without acquiring the asset. Because the leasing company remains the legal owner, the vehicle does not appear as an asset on the business balance sheet, and the monthly payments are treated as a revenue expense.
How it works step by step
Businesses enter a hire agreement for a set term and mileage. Monthly rentals are accounted for as operating expenses. At the end of the term, the vehicle is returned to the finance provider. No capital allowance claims are made by the hirer as ownership does not transfer, nor is there an option to purchase at the end of the contract.
What you pay and what is included
Monthly rentals are fixed and inclusive of the cost of the vehicle usage and standard Road Fund Licence. Maintenance packages, if selected, are invoiced separately. VAT is applied to all elements of the rental. For commercial vehicles used for business purposes, the full amount of VAT on the rental may be recoverable, provided the business is VAT registered and the van is used solely for business journeys.
Who it suits and who it does not
This structure is relevant for companies seeking to minimise administrative burdens regarding asset depreciation and disposal. It is not suitable for businesses that intend to own their fleet or those that require significant structural modifications to the vehicle which may not be permitted under standard return conditions.
Questions to ask before you sign
A business owner should ask their accountant specifically about the impact of private use on VAT recovery, as even incidental personal use can complicate the reclaim process for commercial vehicles. Discuss how the monthly rentals should be recorded in the profit and loss account, and ensure you understand the VAT treatment of the maintenance element, which may differ from the rental itself. Ask about the implications of any non-business use on the deductibility of the lease costs for corporation tax purposes.
FAQs
How is VAT reclaimed on contract hire rentals? VAT-registered businesses can generally reclaim the VAT on commercial vehicle rentals provided the vehicle is used exclusively for business purposes. If the vehicle is used for private purposes, even incidentally, the ability to reclaim VAT is restricted. You must consult your accountant to ensure your record-keeping meets HMRC requirements for business-only use.
Are lease payments deductible for corporation tax? Yes, for commercial vehicles, the monthly rental payments are typically deductible as an operating expense against business profits. Because the vehicle is not an asset of the business, you do not claim capital allowances. Always confirm with your tax advisor whether your specific vehicle usage qualifies for full deductibility.
Does the vehicle appear on the balance sheet? Under standard contract hire, the vehicle is owned by the finance provider, not the hirer. Consequently, the vehicle is not capitalised on the hirer's balance sheet, and the obligation for future rentals is generally disclosed as a commitment rather than a debt.
Can I reclaim VAT on the maintenance portion of the contract? VAT on maintenance packages can be reclaimed if the business is VAT registered, but only if the maintenance relates to business use of the vehicle. If the vehicle is used for both business and private purposes, the VAT reclaim may need to be apportioned accordingly.
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