Finance options

Contract Hire

Technically an operating lease, Contract Hire offers a fixed payment over a flexible period of the lease with no risk to the customer on disposal. The vehicle is kept off the companies balance sheet, as set out in the rules laid down in (SSAP 21) for operating leases, whilst a percentage of the rental can be offset against taxable profits. Value added Tax is charged on the rentals with 100% of the VAT being reclaimable on the maintenance part whilst only 50% can be reclaimed on the finance part if any private use of the vehicle is applicable.

Summary: Contract Hire is tax efficient and offers a clean route to funding your company vehicles with no disposal risks.

Personal Contract Hire

Personal contract hire is commonly referred to as a vehicle lease. The vehicle is purchased by the finance company who estimates a value of the vehicle at end of the term and your monthly payment consists of the depreciation and interest. The benefits are simply no residual value risk and fixed payments but the vehicle has to be returned in a reasonable condition and not a greater mileage than stated at contract inception or the finance company will levy a charge for this.

Finance Lease

This form of leasing offers a fixed payment over a flexible period of the lease with the responsibility of the disposal lying with the client. Any reward or risk upon disposal is entirely with the client, Finance Lease can be offered with a final residual payment or without on a fully amortised basis with all rentals attracting Value Added Tax. The vehicle is capitalised onto the client’s balance sheet in accordance with (SSAP 21) and is countered on the liability side by the capital element of the outstanding rentals.

Summary: Finance Lease offers a tax efficient funding plan where companies want to take the responsibility of the resale of the vehicles.

Contract Purchase

The client agrees to purchase the vehicle via a series of monthly payments comprising of a proportion of capital and interest. A final Guaranteed balloon / residual payment is inclusive which is pre stated on the contract at the point of sale which is equal to or less than the predicted future value. For tax purposes ownership of the vehicle is transferred to the client on the date the contract is signed. At the end of the agreement if the vehicle is worth less than the pre agreed balloon / residual value, the client can hand the vehicle back to the finance company without penalty although excess mileage and condition penalties may be applicable.

The vehicle is classed as an asset of the company and the client gains access to the writing down allowances, a balancing charge or allowance is calculated upon disposal effecting a full, if delayed depreciation for tax purpose. No Value Added Tax is applicable to this finance plan.

Summary: A finance product for those who wish to own their vehicles but avoid the risk of financial loss upon disposal.

PCP

Personal Contract Purchase has terms normally up to 48 months again with fixed repayments and a guaranteed future value which you pay to own the vehicle at the end of the agreement although you can also choose to hand the vehicle back to the finance company. The vehicle needs to stay within the mileage amount stated at contract inception and also returned in a reasonable condition or the finance company does have the right to levy a charge for the loss in value.

Hire Purchase & Lease Purchase

A tried and tested method of achieving vehicle ownership is Hire or Lease Purchase. Usually hire purchase is subject to an initial deposit followed by monthly payments until the full amount of the loan including interest is discharged, the final payment usually has an option fee added and when this is paid the title of the vehicle passes. For the record, conditional sale is a similar product although title passes automatically upon the agreements inception.

Lease Purchase operates in a similar way and has a residual or balloon payment at the end of the agreement. The benefit in looking at Lease Purchase over Hire Purchase is that the same value of vehicle can be purchased over the same period at a lower monthly cost as a proportion of the outstanding amount is incorporated into the fixed residual or balloon payment. Both options offer on balance sheet funding with access to writing down allowances and for tax and accounting purposes, the purchaser is treated as the owner of the vehicle when the agreement is signed and not when the purchase option is exercised. All interest payments are deductible from profits as a trading expense. No Value Added Tax is applicable to these finance plans.

Summary: Ideal funding method for companies who require the vehicle to be shown as an asset and wish to take the responsibility for the resale and disposal.

Balanced Payment Plan

This finance option allows a double benefit where the client requires a fixed payment linked to a variable interest rate facility. The client can benefit from future interest rate reductions and lower interest penalties upon early settlement of the agreement. The finance house base rate (FHBR) will fluctuate during the agreement and in the event that the (FHBR) is higher than that reflected in the periodic payments, then your payments will continue until the capital and interest balance is repaid. Alternatively should the (FHBR) be lower than originally assumed, then fewer payments will be required to complete the agreement. Capital lump sums can also be paid to create a shorter repayment period. In some cases the original monthly rental can be reduced whilst leaving the payment period as per the original agreement.

Summary: Ideal for clients who traditionally settle their agreements early and who take the responsibility of the disposal of their vehicles.

Sale & Leaseback

The ideal solution for companies who want to release the capital tied up in existing fleets straight into company reserves and remove the vehicles from the Balance Sheet. Subject to book value and specific requirements, the leasing or finance company can purchase your existing fleet and lease or contract hire them back to you for a pre agreed rental and period.

Additional benefits of sale and leaseback are that all your vehicles are purchased via a single paper transaction allowing a cash injection into the business which can improve gearing ratios. The company can take a new for old agreement where they benefit from the finance or lease companies disposal routes to release the cash value of the vehicles and replace them with new vehicles on Contract Hire.

Summary: Ideal for companies who require a cash injection for use in other projects, in addition this product removes any future disposal responsibilities or risks.

Car leasing and contract hire - ContractHireAndLeasing.com