Contract Types
- Contract Hire
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A low initial payment, followed by regular monthly payments provide for depreciation and funding of the vehicle without ever having the risk of ownership. Maintenance can be included in the monthly charge leaving only fuel and insurance to find. Fixed costs for a set term and mileage make this funding option a popular choice with numerous businesses, giving piece of mind and a tax effective solution to vehicle acquisition. Tax allowances of up to 100% of the payments are available dependant on the type and/or cost of the vehicle. i.e. Commercial vehicles have full allowances whilst passenger cars may be reduced. Additionally, since August 1995, finance companies have been able to recover VAT on vehicle costs and enables further benefits to be passed on through the contract rental. However some VAT restrictions (usually 50%) apply should the vehicle be available for private use.
- Contract Purchase
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A conditional sale agreement with regular monthly payments followed by a larger final payment. In practice users often choose to return the vehicle to the finance company to avoid disposal headaches. As with other "purchase" schemes the finance repayments do not attract VAT. Optional maintenance payments, giving total fixed cost budgeting, do attract VAT but with 100% recovery (subject to VAT status).
- Hire Purchase
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A fixed cost, fixed period loan, utilising an initial deposit followed by monthly payments, usually for periods of between 2 and 5 years. Ownership passes following the final payment. As the monthly costs constitute loan repayments, they do not attract VAT. The capital cost an be written down for tax purposes on a reducing balance basis, with the vehicle shown on the company balance sheet.
- Lease
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Specifically structured to fund the use of the vehicle over a set period, generally with a relatively small deposit, the majority of the sale proceeds going to the leassee as the vehicle is never owned. Leases may be "fully amortised" with the full cost of the vehicle funded over the period, or "balloon", whereby a final lump sum payment is utilised to reduce the regular monthly costs. VAT is payable on the payments with this type of agreement. Tax deductions are available dependant upon the type and/or cost of vehicle. i.e. Commercial vehicles have full allowances whilst passenger cars may be reduced. In addition, VAT advantages exist as with Contract Hire.
- Lease Purchase
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A structured agreement with a variable initial deposit, regular monthly payments and an option of utilising a final balloon payment in order to reduce the monthly cost. Ownership passes following the final payment. Repayments do not carry VAT and are treated for tax in the same manner as hire purchase with the vehicle again shown on the balance sheet.
- Personal Contract Hire
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With this product, in return for a pre determined fixed monthly payment, the finance company take responsibility for the vehicle's depreciation, funding and administration costs. When a maintenance package is included, this responsibility also extends to the service, maintenance and repair (excluding accident damage) of the vehicle and can also cover road fund licence for the contract term. Payments, or rentals as they are better known, are based upon the contract term and mileage. At the end of the contract period, the vehicle is returned to the finance company.
- Personal Contract Purchase
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A structured plan for individuals where an initial deposit, usually relatively low, is followed by regular monthly payments based upon a fixed term and a mileage. Subsequently, options exist of either handing the vehicle back or paying a final payment (originally fixed at the contract start based upon the term and mileage) and taking ownership. Schemes of this nature, paid for by the individual, are often utilised to avoid the necessity of Benefit in Kind taxation. Maintenance options may be added to the fixed monthly cost giving piece of mind motoring.