Business Contract Purchase Explained

So how does it work? A company chooses a brand new vehicle, pays an initial deposit and then continues to pay for the car or van in fixed monthly instalments. With a contract purchase agreement, the monthly finance payments are not subject to VAT. At the end of the contract, the company has the option to purchase the vehicle at an agreed price.

NB: Nationwide Vehicle Contracts are specialists in Contract Hire and Personal Contract Hire agreements. While Business Contract Purchase agreements are no longer available with Nationwide Vehicle Contracts, it is important that you review the benefits and exclusions of every lease contract to better understand which agreement is best suited to your needs.

How could it work for your business?

If your company leases a vehicle on a contract purchase basis, you will pay for the vehicle in monthly instalments for a contract of 24 or 48 months, for example.

At the end of the contract, the company or driver can then purchase the car for a predetermined amount – known as a balloon payment – as long as the terms of the initial agreement have been met.

Contract purchase is ideal for businesses that like to run high value vehicles and don’t want to have to worry about the risk of depreciation.

If yours is a VAT registered company, you will not have to pay VAT on the monthly finance payments. It’s worth noting, however, that if you take out an optional service or maintenance package, VAT is payable on the service costs.

It is worth noting that other types of business leasing contracts – such as contract hire and finance lease – are often more popular and common than contract purchase. This is because they offer more flexibility at the end of contract term than a contract purchase agreement.

If you’ve got further questions about which type of lease contract is best for you and your business, take a look at the information we’ve provided on each of the different contracts. Alternatively, give our team a call on 0345 811 9595.

The key features of business contract purchase

• A guaranteed residual value – otherwise known as the balloon payment – is agreed at the start of the contract
• Fixed monthly payments cover the rental of the vehicle, plus any maintenance options if chosen, throughout the duration of the contract
• The monthly payments are calculated by taking the following into consideration:
  • The cost of the vehicle
  • The contract period
  • Agreed residual value to be paid at the end of the agreement
  • Mileage allowance (as chosen by you before the start of your contract)
  • Any additional options, such as a maintenance package
• At the end of agreement, when all payments have been made, ownership passes to the customer
• VED tax is provided for the first 12 months of the contract

The key benefits of contract purchase for business

• Low initial rental
• Fixed monthly payments to make budget planning easier
• Flexible terms to meet your company’s requirements, with variable contract duration and mileage terms
• The finance company guarantees the resale value of the vehicle at the end of the agreement for a known fixed amount
• Maintenance and other added value services can be included in the contract
• The value of the vehicle can be written down against taxable profits
• If yours is a VAT registered company, you will not have to pay VAT on the monthly finance payments

What happens at the end of the contract?

At the end of the agreement, customers don’t have to purchase the vehicle – it’s just one of the options available. At the end of a business contract purchase agreement, there are three options:

• Hand the vehicle back to the leasing company
• Pay the purchase fee and the final rental amount – that means pay the balloon payment outright and own the vehicle
• Refinance the final rental amount if applicable, subject to credit – that means pay the balloon payment in monthly instalments. At the end of these payments, you own the vehicle