0345 811 9595

Mon-Fri 9am to 5.30pm

Business Contract Hire Explained

What is business contract hire?

Business Contract Hire (BCH) is a long-term vehicle lease hire agreement of two to four years, suitable for sole traders, partnerships, and limited companies who don’t want to own the vehicle.  

It is a popular option with VAT registered companies as they can claim back 50% of the VAT on vehicle payments (100% for vans) and 100% of the VAT on maintenance costs.

How does business contract hire work?

With Business Contract Hire, a company pays fixed monthly rentals for an agreed period (usually 24 to 48 months) for the use of a vehicle.

At the end of the agreement, the vehicle is returned to the finance provider, leaving them to worry about depreciation values and the disposal of the vehicle.

Contract hire allows a business to concentrate on its core activities while avoiding the financial risk and administrative burden of owning a vehicle or fleet.

What are the key features of business contract hire?

Business Contract Hire offers many features over other types of lease agreements, including:

  • Finance provider remains the owner of the vehicle, meaning the vehicle appears ‘off the balance sheet’ of your company
  • Fixed monthly rentals for the entirety of the contract
  • VAT benefits on rentals and maintenance element for VAT registered companies
  • Option to claim excess mileage charges as expenses
  • VED rates is provided for the full term of the contract
  • Option to change your vehicle every two, three or four years 

With Business Contract Hire, the monthly rentals are calculated by taking the following into consideration 

How Business Contract Hire rentals are calculated

  1. Cost of the vehicle

    The price of the vehicle at the start of the agreement, also known as purchase price or OTR value. 

  2. Contract term

    The length of contract, which is usually two, three or four years.
  3. Initial rental

    This acts as your first payment and is chosen by you before the start of your contract. This is usually equivalent to three, six of nine months rentals.

  4. Annual mileage

    The yearly mileage allowance, as chosen by you before the start of your contract. You may be able to amend the mileage during the contract term.

  5. Anticipated residual value

    How much the vehicle is likely to be worth at the end of the contract. This is calculated by taking into consideration the estimated depreciation value of the vehicle, which is the difference between the car's value at the start and end of the contract. 

  6. Additional contract options

    Any additional options added to the contract, such as a maintenance and servicing package. 

All of this helps estimate how much the vehicle is expected to be worth when the agreement ends. A monthly rental is then calculated to bridge the gap between how much the vehicle is worth at the start of the agreement, and its anticipated resales at the end - otherwise known as its depreciation.

At the end of the business contract hire agreement, you return the vehicle to finance provider, leaving you free to start a new contract if you wish.

Is my company eligible for business contract hire?

Business contract hire is available to financially eligible sole traders, partnerships, and limited companies. To find out whether you’re likely to be eligible for finance, take our business finance eligibility questionnaire.

What type of company are you?

How many years have you been trading for?

How many years have you been trading for?

Businesses trading for under two years may find it difficult to obtain vehicle finance. This is because it is difficult for the finance provider to objectively gain insight into the business and the potential lending risks involved. New businesses may be required to submit 3 months business bank statements, management accounts (if available) and a director's guarantee (ltd companies only) to support your finance application. In some cases, a larger initial rental may also be required.

Would you consider a personal finance application?

Yes

Has your company ever been declined for finance?

Has your company ever been declined for finance?

Would you be willing to provide a Directors Guarantee?

Good News!

You are likely to be eligible for business finance based on the details you provided.

What would you like to do next?

We're sorry, but you are not currently eligible for business finance

Lenders may require more detail on some of the answers you provided before you will be eligible for finance.

Please call us on 0345 811 9595 to discuss your finance options

Latest leasing deals

What are the benefits of business contract hire?

Business Contract Hire offers many benefits, including:

  • Low initial rental leaving you with more money to invest in other areas of your business
  • Fixed rentals for the contract term, making budget planning easier
  • Flexible contract duration and mileage terms to meet your company’s requirements 
  • No depreciation or disposal concerns at the end of the contract
  • Monthly rentals are offset against your annual corporation tax or self-assessment tax return
  • Vehicle road tax is provided for the full term of the contract
  • Maintenance and servicing can be included in the monthly rental, spreading the cost
  • Flexible invoice arrangements help to considerably reduce administration
  • VAT registered companies can claim back 50% of the VAT on vehicle rentals or 100% for vans
  • 100% of the VAT can be claimed back on maintenance costs

What are the disadvantages of business contract hire? 

Like every type of finance agreement, Business Contract Hire comes with many considerations, including:

  • Early termination can be expensive
  • Excess mileage charges may apply if you exceed your agreed mileage, charged on a 'pence per mile' basis
  • You must return the vehicle in a well-maintained condition. Any damage over Fair Wear and Tear will be subject to additional charges
  • The vehicle must be insured with full comprehensive cover
  • You will never own the vehicle and there is no option to buy it at the end of the contract

What is the difference between Business Contract Hire, Business Contract Purchase and Finance Lease?

Business Contract Hire differs to other types of business finance agreements, such as Business Contract Purchase and Finance Lease in several ways. 

The table below explains the key differences between the contract types to allow you to make an informed decision about what is best for your business. 

Differences between business hire agreements

Business Contract Hire (BCH) Business Contract Purchase (BCP) Finance Lease (FL)
Fixed monthly rentals Y Y Y
Low initial outlay Y N Y
Ownership of vehicle N Y N
Tax Benefits Monthly rentals may be offset against taxable profits* Businesses might be able to claim tax relief on the interest charged across the period of the hire purchase contract* Monthly rentals may be offset against taxable profits*
VAT Y - 50% of vehicle rentals (private use) or 100% of vehicle rentals (business use) for VAT registered companies*. 100% on maintenance costs
N - For commercial vehicles, you will pay VAT upfront but can claim back 100% if VAT registered* Y - 100% of vehicle rentals for commercial vehicles for VAT registered companies*
Inclusive road tax Y N – First 12 months only N
End of contract Hand vehicle back Pay balloon payment or hand vehicle back Sell vehicle to third party and pay funder outstanding balance
Maintenance Optional OptionalN
Mileage charges Possible if exceeded N/A if keeping vehicle N/A
Damage charges Possible depending on condition N/A if keeping vehicle N/A
Return flexibility Fixed term – early term can be expensive Fixed term – early term can be expensive Fixed term – early term can be expensive

* Please speak to your tax advisor or accountant for further information. 

What happens at the end of the contract?

At the end of the contract, the vehicle is returned to the car leasing provider, meaning you are then free to hire another vehicle or vehicles, without any financial obligation.

If you have exceeded your agreed mileage, an excess mileage charge will be payable, worked out on a ‘pence per mile’ basis as set at the start of your contract.

When returning your vehicle, it will also be assessed according to the BVRLA Fair Wear and Tear guidelines. Any damage that falls outside of these guidelines may be subject to end-of-lease penalty charges. 

For more information on this, visit our Fair Wear and Tear guide page.

Business contract hire case studies

Case Study 1

Joe Bloggs owns his own Limited Company – a property management firm. He takes out a cheap contract hire deal on a Mercedes E Class Saloon, as part of his fleet of three vehicles.

The contract:

  • Duration: 48 months
  • Annual mileage: 15,000
  • Initial rental: £3243.06 + VAT
  • Monthly rentals: £540.51 + VAT

As the property management firm is a VAT registered company, any VAT paid on the vehicle can be claimed back.

At the end of the contract, the Mercedes E Class is returned to the car leasing company. Joe Bloggs decides to take out an in stock business lease deal on the latest Mercedes E Class for a further 48 months.


Case Study 2

John Smith is a sole trader, working as a painter and decorator. He needs only one van, so takes out a business contract hire agreement on a Ford Transit Custom.

The contract:

  • Duration: 24 months
  • Annual mileage: 20,000
  • Initial rental: £1473.00 + VAT
  • Monthly rentals: £245.50 + VAT

Ply lining is applied to the van before it reaches Mr Smith to protect the vehicle and help reduce the risk of de-hire damage charges. Mr Smith chooses to apply his own company decals on his van to help promote his business on the road.

At the end of the contract, Mr Smith cleanly removes the decals before returning the vehicle to the leasing company. He then decides to purchase a different van for future use.

Please note: case studies created for illustrative purposes only.

Business leasing deals

If your business is looking to lease a car or van on a contract hire basis, then browse our business leasing deals, or call our leasing specialists on 0345 811 9595 to discuss the options available to you.

Contract Types Contract Purchase

You may also like...

Top