Contract Types

Business Contract Hire
 
How it works
The Contract Hire company calculates the residual value for the vehicle based on the age, length of hire and the mileage it will be covering. They charge the user a monthly rental to cover depreciation over that period plus a funding charge, along with any add-on services required such as maintenance. The user has no risk in ownership and has a predictable monthly cost. The user effectively pays just for the use of the vehicle.
 
Popular with...
Companies who are VAT registered.
 
Risk
The funder assumes the risk of the residual value of the vehicle.

Advantages
• Low initial outlay
• The costs are predictable and risk-free
• The user has no risk of depreciation and disposal
• The vehicle is off balance sheet
• The rentals can be offset against the taxable profit
• The administration and management burden can be transferred to a third party
• Maintenance of the vehicle can be included as an option
• If the vehicle is used solely for business (i.e. pool car, commercial vehicle, daily rental) the user can reclaim 100% of the VAT on the rental. If it used for both business and pleasure, the user can reclaim 50% of the VAT on the finance element of the rental and 100% of the VAT on the maintenance element if included
• The contract generally includes road fund licence at the current rate for the complete term of the agreement
 
Disadvantages
• It is costly to early terminate the agreement
• It is important to correctly assess your annual mileage as an excess mileage applies at the end of the agreement. It may however be possible to reschedule your mileage during the contract if you incorrectly estimate it, or your circumstances change

Personal Contract Hire
 
How it works
Personal Contract Hire (PCH) gives the user a fixed equal monthly rental for a fixed contract term and mileage. At the end of the contract the vehicle is simply handed back.
Popular with...
Company car drivers who are given a car or mileage allowance instead of company vehicle. It allows the individual to make his/her own choice and arrangements. This will avoid benefit-in-kind taxation.
Risk
The funder assumes the risk of the residual value of the vehicle.
Advantages
• Low initial outlay
• More tax-effective than a Personal Contract Purchase (PCP) if the vehicle is used partly for business use
• The contract is not subject to a final balloon payment
• The contract generally includes road fund licence at the current rate for the complete term of the agreement
• Maintenance of the vehicle can be included as an option
Disadvantages
• It is costly to early terminate the agreement
• It is important to correctly assess your annual mileage as an excess mileage applies at the end of the agreement. It may however be possible to reschedule your mileage during the contract if you incorrectly estimate it, or your circumstances change

Personal Contract Purchase

How it works
Personal Contract Purchase (PCP) is like a lease purchase agreement (an HP agreement with a balloon) but where the driver has various options at the end of the agreement. He/she can either return the vehicle or pay the balloon payment and keep or sell the vehicle. The balloon payment relates to the anticipated value of the vehicle at the end of the term based on the mileage set at the start of the contract. This end value is known as the guaranteed minimum or future end value (GMEV or GFEV).
Popular with...
People who like to change their cars on a regular basis and who like to have a guaranteed value. This has been particularly useful with the unsettled market.
Risk
The individual can have the option to buy the vehicle without assuming any residual value.
Advantages
• Low initial outlay
• The individual has the option to either purchase or return the vehicle at the end of the contract
• The contract can be determined at any time subject to payment of the settlement figure
• Maintenance of the vehicle can be included as an option
Disadvantages
• PCP is not as tax-effective compared with Personal Contract Hire (PCH) if used for buinsess
• It is important to correctly assess your annual mileage as an excess mileage applies at the end of the agreement. It may however be possible to reschedule your mileage during the contract if you incorrectly estimate it, or your circumstances change
Summary
PCP is becoming more and more popular with people looking at their tax liabilites in relation to company motor vehicles, and people who previously purchased vehicles using the traditional HP method.