Contract Hire – Information & Advice
The term contract hire refers to the personal or business contract agreement between a lessor and lessee of a vehicle. A contract hire agreement generally lasts for between 12 and 60 months and has become more and more popular over the last few years of economic struggle for emerging businesses.
A contract hire agreement can be extremely beneficial to individuals and companies for a number of reasons, though it is important to note that there is almost always a set mileage limit for the distance covered in the vehicle. If the limit is breeched then there will certainly be extra costs incurred on completion of the agreement.
The most popular form of contract hire is between a business and the leasing company. The market for personal contract hire agreements is small, though has been slowly increasing in size recently due to the slowing down of the financial markets. In recent years, major companies in the sector are reducing their efforts in marketing personal contract hire in favor of the business market.
The total cost of the agreement will primarily be based on the depreciation of the vehicle over the course of the agreement. Other factors that will determine the premium will be the total length of the contract, the projected mileage over the course of the contract and any other services that have been agreed upon by the lessor and lessee.
The ownership of the vehicle will never leave the hands of the leasing company over the period of the agreement. The contract is, in effect, only to hire the vehicle for the time of the contract. Bearing that in mind, in most cases the user of the vehicle will have the option to purchase the vehicle, generally at its market value, after the contract has ended.
When a contract hire agreement is set up, it is also common for companies to make use of a maintenance agreement in which the lessor will be liable for any costs involved in general vehicle maintenance. This maintenance agreement can cover a variety of costs depending on what has been agreed on at the start of the contract. Generally, though, a maintenance agreement will cover general wear and tear including tyre wear and other consumables. An additional service of breakdown recovery could also be chosen.
The benefits of a contract hire agreement are that there are no vehicle depreciation risks to incur, 50% of VAT payments can be recovered for VAT registered companies, minimum capital expenditure, fixed interest rates, and reduced administration.
The only major disadvantage to a contract hire agreement is that you are not paying for ownership of the vehicle, you are simply paying the depreciation costs plus other taxes mentioned above. Compared to vehicle financing agreements, you will be losing money; however, you will also have the opportunity to get a brand new car every couple of years!