Contract Hire, often referred to as an Operating Lease, is a long term rental agreement. Contracts range from 1 to 5 years and are tailored to the businesses requirements.
The Contract Hire Company reclaims the VAT on the original purchase, which reduces your monthly rentals (which are + VAT). Contract Hire is a very popular choice for VAT registered companies as they can claim back 50% of the VAT on the finance element for cars and generally 100% for commercials (subject to no private use, no exempt turnover and not being on the Flat Rate VAT Scheme).
On contracts with maintenance the VAT on the service element is 100% recoverable. One of the major benefits is that there are no disposal worries as the future value is underwritten by the leasing company. Another benefit of Contract Hire is that it is generally 'off balance sheet funding' (subject to legislation change) which means it can improve your gearing ratio (assets to borrowing ratio) and therefore possibly your borrowing ability in the future.
Your business uses the vehicle while paying a rental rather than a repayment.
The monthly rental is determined by the initial cost of the vehicle (excluding VAT), the period of the finance lease and the residual value (the estimated future value of the vehicle at the end of the finance lease period once depreciation is taken into account), plus interest.
Although you never take ownership, at the end of the finance lease contract a payment equivalent to the residual value is payable. Usually this means that the vehicle is sold and a proportion of the proceeds of the sale are returned to the lessee.
Most finance lease companies will offer a number of payment options to suit your cash flow. You can lower the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly rentals (normally referred to as a fully amortised Finance Lease), in which case you may be able to extend the finance lease with a secondary rental (sometimes called a peppercorn rental).
A hire purchase agreement, also referred to as HP, is a hire agreement which gives you an option to purchase at the end of the agreement. HP is normally a fixed cost (where the APR is set before the contract begins), fixed period loan (typically, 2-5 years) of money to purchase goods, which is secured against the vehicle being bought.
You are the registered keeper of the car and are responsible for insuring and maintaining it, but the finance company providing the HP agreement remains the legal owner (‘has title’) of the car until the amount you have borrowed has been fully repaid and you have decided to pay the ‘Option to Purchase’ fee. However, this is completely optional.