How contract hire works:
> You take out a vehicle rental for an agreed term
> The rentals are based on your annual mileage, which dictates the depreciation on the vehicle and sets the monthly lease amount
> You will pay an initial payment of 3 or sometimes 6 months in advance – this is not refundable
> Most contract hire agreements are on a “spread” rental basis; which means the initial payment make up the first month, then payments are made from month two right up until the end of the contract (i.e. 3×35)
> At the end of the contract the vehicle is handed back to the finance company; there is no option to buy
> Excess mileage and refurbishment charges may be incurred if your vehicle requires attention or has driven over the agreed allowance; these charges should be fair and reasonable
Leasing a vehicle is an excellent way to run your company cars as savings can be made in three key areas
1. Value Added Tax (VAT)
When you take out a contract hire agreement, you can claim back 50% of the VAT on the monthly rental. You can also claim back 100% on the maintenance element, if you choose to take out a maintenance contract.
If the vehicle is used exclusively for business (which does not include the commute!) then you can claim back 100% of the VAT rather than 50%. The maintenance element remains the same regardless of the vehicle’s use.
2. Corporation Tax
If your vehicle choices are below the 130g/km CO2 emission mark, you can claim 100% of rental against corporation tax.
This means that you can reduce the taxable profits that your company pays by offsetting the rentals from your vehicle, this means ultimately that you will pay less corporation tax.
Prior to 2009, tax relief for leased vehicles was dictated by the retail price of the vehicle. Post 2009, tax relief has been calculated by CO2 emissions.
From April 2013, if you run a company vehicle that is below 130g/km CO2 emissions, the allowed offset rental percentage is 100%.
If your emissions are above this magic number, your allowed rental percentage is 85%. So to make the most take savings, make sure your company cars are below 130g/km.
