What is Business Contract Hire?
27th May 2022
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Business contract hire, sometimes referred to as BCH is a funding product that allows businesses to fund cars or commercial vehicles over a fixed period of time and pay a monthly rental calculated on the expected mileage of the vehicle.
In a business contract hire agreement typically an initial rental is taken, which is normally calculated as an equivalent to 1-9 of the monthly rentals and agreements can either include funder maintenance or customer maintained, meaning the business is responsible for service and maintenance in line with the manufacturer recommendations.
Agreements are generally calculated over two or three years, and the mileage allowance is agreed upon in advance – the minimum is normally 10,000 miles per year and the maximum is normally 40,000 per year, and it is important to set the mileage correctly upfront, however, some funders do allow a contract reschedule during the term, normally after the first 12 months.
At the end of the agreed period, the vehicle is returned to the finance company, and you are free to buy or hire a new vehicle depending on your requirements.
The benefits of Business Contract hire
Fixed costs
One of the benefits of Business Contract Hire means you’re making a fixed monthly rental with a minimal initial outlay. There is no fluctuation in the monthly rentals amounts for your contract. The amount remains fixed, so you can plan your expenditure without having to worry about unexpected surprises.
Meaning you can take advantage of new vehicles for your business without having to spend large amounts of cash from your business’s reserves. That leaves you with more money to invest in other areas of your business.
Available to businesses of all shapes and sizes.
Business contract hire is an incredibly cost-effective solution for businesses of all shapes and sizes, and is suitable for sole traders, partnerships, and limited companies, as agreements can be tailored to create the best deal for your requirements.
No depreciation
When you buy vehicles outright, your business will likely face the prospect of losing up to 60% of the value of those vehicles within the first three years of owning them because of the depreciation of the vehicle cost.
With Business Contract Hire, there is no need to worry about losing money. The depreciation of the vehicles you lease is taken on by the lease company and will not affect your lease contract. You simply return your vehicle at the end of the agreement and take out a new contract on a new vehicle if required.
Reclaim your VAT
Reclaiming VAT is yet another great benefit to leasing your company vehicles. If your business is VAT registered, you can reclaim the VAT from your lease. If the vehicle is used for both business and personal situations, you can claim back up to 50% of the VAT. However, if the vehicle is used solely for business purposes, you could claim back 100%.
Well-maintained vehicles
If you choose the option, you can add a maintained option to your agreement, this means the leasing company will take care of the maintenance and the price for this will be included in your monthly rental.
What type of vehicles are available?
Almost all types of vehicles are available, from small city cars such as Fiat 500’s, Citroen C1’s and Hyundai i10’s, all the way to 4×4’s and SUVs like Tesla’s Model Y, Volvo’s XC60 and Land Rover Discovery Sport.
Vans are also available on business contract hire agreements, starting with small vans, all the way up to minibusses, pickups, and tippers.
Plug-in Hybrid (PHV)and electric vehicles are also extremely popular options on contract hire, with HMRC confirming very low company car tax for all pure electric and plug-in cars from 6th April 2022 through to 2025. This means huge savings on electric and PHV vehicles via the scheme as the income tax and NI savings are maximised.
Can private individuals use contract hire?
Yes, this is called Personal Contract Hire. It is similar to other contract hire agreements with the main difference being that it only applies to a specific individual rather than a business.
As with business contract hire, people find this agreement appealing as it means that they don’t have to worry about the eventual resale or residual value of the car, and as you don’t actually own the vehicle, once your contract is finished you can walk away without any extra obligations.
Important points to note about business contract hire
You will need to estimate the term & mileage for the use of the car or van before delivery.
If you need to cancel the contract early there may be a termination charge.
If you go over the agreed mileage allowance, excess mileage will be charged for each mile over that is stated in the contract.
You must look after the car and return it in a well-maintained condition, if not you will be charged for any damage over & above what is classed as “Fair Wear & Tear”.
In Summary,
Why contract hire?
- Fixed monthly costs based on the expected use of the vehicle
- Administration – contract hire vehicles include road fund license and can also include maintenance booked on the phone meaning low head office admin. Vehicles can be delivered to and collected from drivers so if you have a national team no need to interrupt the working week to visit head office.
- Low initial outlay – in comparison, hire purchase agreements typically include large upfront payments.
- Tax-efficient – if VAT registered then 100% of the VAT on commercial vehicles can be reclaimed, 50% of the VAT can be reclaimed on cars and in both instances 100% of the VAT on maintenance can be reclaimed. Up to 100% of the rental can be offset against taxable profits
Disadvantages to contract hire
- You will not own the vehicle
- Contracts are mileage-based so excess mileage may occur at the end (if the contract is not rescheduled during)
- Potential for end of contract charges – vehicles are inspected via the BVRLA fair wear and tear guidelines which we can provide with your quotation
If you are interested in Business contract hire, please do not hesitate to contact us and a member of our team will go through all your options to find the right deal for your circumstances.
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