Save Tax with Contract Hire
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Car leasing, personal contract purchase, contract hire, lease purchase and car loans are all different ways to finance the cost of cars and vans. Many people are confused by the differences in these financing options so I thought I would focus on ‘contract hire’ and explain how this technique works.
Leasing addresses one of the biggest issues associated with the acquisition of new vehicles and that is depreciation. The value of your brand new car falls through the floor, even before you have driven away from your supplier.
When you take out a car lease the residual value of your chosen car or van is calculated. This is the estimated value of the vehicle at the end of the agreed lease period, usually 2 or 3 years, based on your expected mileage in that period. The calculated residual value of your chosen vehicle is then deducted from either the current manufacturers retail price, or a value agreed with the leasing firm, and you will pay the remainder through your monthly lease payments. So the higher the residual value as a proportion of the current value, the less you will need to pay each month.
Contract hire is a vehicle financing method that has maximum benefit for customers who are registered for VAT, so it is most suitable for businesses and the self-employed. If your vehicle is used exclusively for business purposes you will be pleased to find that you can reclaim 100% of the VAT. Even if you use your car or van for some personal use you can still reclaim 50% of the VAT.
In a contract hire agreement you actually hire the vehicle for an agreed period, usually for between 12 and 60 months during which time a fixed rental is paid, based upon the mileage. At the end of the agreed contract hire period, as in the case of car leasing, the vehicle is returned to the supplier. There are no surprise disposal or depreciation costs.
Contract hire will generally include full vehicle maintenance which can optionally include routine servicing and even replacement tyres. Up to 100% of the rental charges can be offset against taxable profits and minimal capital outlay is required.
It’s therefore no surprise that contract hire is the favoured financing option chosen by many businesses and self-employed people.
For cheap car leasing I recommend Nationwide Vehicle Contracts.
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