Acquiring vehicles represents a significant financial challenge for many businesses, demanding substantial capital. Companies must weigh ownership costs against the need for a modern and reliable fleet. Business Contract Hire offers a solution, providing access to vehicles without the burdens of outright purchase. This article explains what Business Contract Hire is, how it works, and its suitability for different business needs.
What is Business Contract Hire?
Business Contract Hire (BCH), often called business car leasing, is a long-term rental agreement allowing a company to use a vehicle for a set term and mileage for fixed monthly payments. The leasing company purchases the vehicle and remains its owner throughout the contract. The arrangement is centered on using the asset, not owning it.
This financial product is designed for various business types, including sole traders, limited liability partnerships (LLPs), and limited companies. The monthly rental amount is based on the vehicle’s purchase price minus its estimated residual value. This means the business finances the vehicle’s depreciation over the lease period, not its entire value.
How Does Business Contract Hire Work?
The process begins with the business selecting the specific cars or vans it requires for its operations. The company then negotiates the lease terms with the finance provider, including the contract duration, which often ranges from 18 to 48 months, and an annual mileage allowance. Mileage is a large factor in the monthly cost, as higher mileage leads to greater depreciation.
After agreeing on the terms, the business pays an initial rental, usually equivalent to between three and nine months of the standard monthly fee. Following this, the company makes fixed monthly payments for the remainder of the term, allowing for predictable budgeting.
At the end of the contract, the vehicle is returned to the leasing company. This frees the business to begin a new lease with brand-new vehicles if it chooses.
Advantages and Disadvantages of Business Contract Hire
Advantages
A primary benefit of Business Contract Hire is the ability to budget with precision. Businesses pay a fixed monthly rental, which helps in managing cash flow as costs are predictable. This structure often includes road tax for the contract duration, and the initial financial outlay is lower than purchasing a vehicle outright, freeing up capital.
For VAT-registered businesses, there are distinct tax advantages. Companies can reclaim 50% of the VAT on the finance element of the rental payments. If the vehicle is used exclusively for business, 100% of the VAT may be reclaimable. A significant appeal is the elimination of depreciation risk, as the leasing company absorbs the vehicle’s loss in value.
Disadvantages
The most significant drawback is that the business will never own the vehicle. Despite making payments, the company builds no equity and is left with no asset at the end of the term. The contract is also built around a pre-agreed mileage limit, and exceeding this allowance results in excess mileage charges.
These fees are charged per mile and can become expensive. Terminating a contract early can lead to substantial financial penalties, often requiring payment of a large percentage of the outstanding rentals. The business is also liable for the cost of repairing any damage that goes beyond “fair wear and tear” when the vehicle is returned.
What is Included in a Business Contract Hire Agreement?
A standard Business Contract Hire agreement bundles several components into the fixed monthly payment. The primary inclusion is the use of the chosen vehicle for the agreed-upon term and mileage. Every contract also includes the cost of the Road Fund Licence (road tax) for the duration of the lease, removing the task of renewing it annually. Most agreements also come with the manufacturer’s warranty and breakdown assistance for at least the first year.
Businesses can opt to add a maintenance package for an additional fixed monthly fee. This package covers routine servicing, replacement tires, and other wearable parts like brakes and wipers. Including maintenance creates a comprehensive fixed-cost motoring solution, covering nearly all vehicle-related expenses except for fuel and insurance.
Business Contract Hire vs Other Vehicle Finance Options
Business Contract Hire’s main distinction from other financing methods is the absence of an ownership option. Its closest alternative is Business Contract Purchase (BCP). With BCP, the structure is similar, involving an initial payment and fixed monthly installments. However, at the end of a BCP agreement, the business has the option to make a final “balloon” payment to purchase the vehicle.
Another alternative is a Finance Lease, a form of long-term rental available only to businesses. At the end of a Finance Lease term, the vehicle is sold to a third party. The business that leased the vehicle receives a majority share of the sales proceeds. This option ties the business to the vehicle’s residual value, meaning it benefits if the vehicle sells for more than expected but is responsible for any shortfall.
What Happens at the End of the Contract?
The end of a Business Contract Hire agreement is a defined process. The finance company arranges to collect the vehicle from the business at the end of the term. Before collection, an inspector conducts a thorough appraisal of the vehicle’s condition.
This inspection is measured against the British Vehicle Rental and Leasing Association (BVRLA) “Fair Wear and Tear” standard. This guide outlines acceptable deterioration for a vehicle’s age and mileage, like small stone chips or minor scuffs. Damage exceeding this standard, such as deep scratches or torn upholstery, will be documented, and the business will be invoiced for repair costs. The final mileage is also checked against the contract’s allowance, with any excess mileage billed at the pre-agreed rate.