What Is Contract Hire And Would It Suit My Needs?

Contract Hire is often referred to as ‘leasing’ (however, just to confuse matters, there are other products and services that are also referred to as leasing).

As the name suggests Contract Hire is effectively a long term hire agreement whereby the customer agrees a contracted mileage over a given period. So for example a customer may predict an annual useage of 25,000 miles p.a. and consequently agree to use a vehicle for 4 years – the contract hire agreement would therefore be 48/100.

The vehicle is scheduled to be returned at the end of the 4 years with approximately 100,000 miles on the vehicle’s odometer. If the vehicle is returned with less than the contracted mileage there is no additional charge (or refund) however there is an ‘excess mileage’ charge for each mileage over the original contract. This excess mileage charge is set out at the beginning of the contract and is usually quoted as x pence per mile.

Customers with more than one vehicle on contract can sometimes pool mileages of vehicles so that the under mileages and over mileages are netted off to mitigate any charges.

Customers can sometimes adjust contract parameters during the hire period where they can accurately predict a different mileage to the original estimation. So if say the driver changes routes and the annual mileage changes to 20,000 p.a. it is possible to change the contract to say 48/80(k miles). This may generate a change to the monthly charge.

The vehicles are charged on a monthly basis and attract VAT.

Contract Hire is often assumed to include all of the servicing and maintenance costs however this assumption is incorrect. Contract Hire without maintenance is also known as an operating lease in financial terminology.

Contract Hire is known as ‘Off Balance Sheet Funding’. This means that, whilst there is a long term contract and commitment, there is neither an asset nor a liability on the customer’s Balance Sheet. This means that a customer can show their accounts without apparent heavy indebtedness and large creditor liability. Such a liability adversely affects the gearing ratio of a balance sheet. Therefore Contract Hire can sometimes be the preferred funding method for companies that need to focus on their gearing ratio for investor purposes.

The off Balance Sheet nature of the credit facility is attractive to some customers that need numerous lines of credit and do not wish to take up important facilities funding company vehicles. Start-up businesses also find this a sympathetic way to get vehicles on credit.

At the end of the contract it is common for the Contract Hire company to offer the vehicle for sale to the driver. As a feature of Contract Hire as an operating lease, the contracted customer can never own the vehicle directly however the driver may well be an employee of the customer/company. Thus the driver can legally be the owner of the vehicle. This is an attractive disposal method for the Contract Hire company as there is no additional costs incurred transporting the vehicle and reconditioning the vehicle for sale purposes.