Contract hire explained for business vehicles

Contract hire is a way of renting a car or van for a fixed period in return for regular rentals, with no right to own it at the end. It is a form of leasing, and the British Business Bank says the principal difference between leasing and hire purchase is who owns the asset.

Here the lessor owns the vehicle throughout. You use it for your business and return it when the term ends. Providers vary in how they describe their products, so always ask who owns the vehicle, what the rentals cover and what you must do at the end.

You agree a vehicle, a term and an annual mileage, then pay a rental each month for the length of the agreement. At the end you hand the vehicle back and either walk away or take a new one on a new agreement.

• You usually pay an initial rental or deposit first, with the rest in regular rentals.
• The term and mileage are fixed at the start and written into the agreement.
• Servicing, maintenance and tyres may be included or may cost extra, depending on the package.
• You return the vehicle in the condition the agreement requires, allowing for fair wear and tear.

None of the amounts are quoted here, because they depend on the vehicle, the term, the mileage and the lender, and they differ between providers.

Contract hire never leads to ownership, while hire purchase does. A finance lease also leaves the lessor as owner, but its terms and accounting differ.

Our guides to what hire purchase is and finance leases versus operating leases go deeper on each one.

For a leased car, a 50% block normally applies to the VAT on the rentals, and you can reclaim the remaining 50% subject to the normal rules. HMRC’s motoring expenses notice says the block is there to cover private use of the car.

The block covers all the VAT on the rentals, including optional services unless they are supplied and identified separately on the invoice, and excess mileage charges that form part of the leasing supply. If you hire a car for no more than 10 days for a specific business purpose and do not otherwise have a company car, the block may not apply.

Vans and commercial vehicles are treated more favourably than cars. The notice excludes vehicles with a payload of one tonne or more from the definition of a car. Your accountant can confirm how your vehicle is classified. Our van finance guide covers vans in more detail.

You do not normally claim capital allowances on a contract hire vehicle, because you do not own it. GOV.UK says you cannot claim on things you lease unless you have a hire purchase contract or long funding lease, because you must own them.

How the rentals are treated in your accounts and tax return depends on your business, so ask your accountant. Employees who use a leased car or van privately can still create a benefit charge, since the rule applies where a vehicle is made available for private use without the property in it transferring. Our capital allowances guide explains the owner side.

What is included depends on the package, and the agreement is the only reliable guide. The rental always covers use of the vehicle for the term; other items are optional or may be bundled in.

• Servicing and maintenance, which some packages include and others leave to you.
• Replacement tyres and breakdown cover, where the provider offers them.
• Insurance, which is normally arranged separately by the business.
• Any modifications, such as racking or signwriting, which usually need the lessor’s consent because the lessor owns the vehicle.

Ask for a written list of what the rental covers and what costs extra. That list is also useful for your accountant, because optional services shown separately on the invoice are treated differently for VAT on a leased car.

You pay the charges the agreement sets for extra mileage and for damage beyond fair wear and tear. The rates are written into the contract, so read them before you sign and set the mileage realistically.

• Estimate your annual mileage honestly, including journeys to jobs and the depot.
• Ask what counts as fair wear and tear and how the return inspection works.
• For a van, ask about charges for racking, signwriting or marks from the load area.
• Ask whether you can change the mileage part way through the term.

You can usually end the agreement early only by paying an early termination charge, and the amount can be significant. The agreement sets out how it is calculated, and it normally reflects the rentals still to come.

Contract hire suits a business that wants a fixed rental and to replace vehicles regularly without owning them. It suits less well one that wants to keep a vehicle for years or to own the asset.

• Often a fit: a business that returns vehicles on a regular cycle and wants predictable rentals.
• Often not a fit: a business with unpredictable mileage, one that modifies vehicles heavily or one that wants to own the van at the end.

If ownership matters, compare it with asset finance on hire purchase terms, and use our guide to comparing lender offers to look at total cost. Our business vehicle finance guide covers the car options side by side.

Any business can apply, but the provider decides. Each lender assesses the business, its trading history and its credit profile against its own criteria, so acceptance varies and nothing is certain in advance.

A new business, a sole trader and a limited company may all be considered, although a lender may ask for a deposit or a personal guarantee from a director. Our guides to business credit scores and soft and hard credit checks explain what a lender looks at and how a search can appear on your file.

Capzy is a credit broker, not a lender, and is paid by the lender. Contract hire is usually offered by specialist leasing providers, and we can introduce businesses to lenders in the asset finance part of our lender directory. Whether a given lender offers contract hire differs from one to the next.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria.