Contract Purchase

Contract purchase is a product under which companies buy cars under a deferred payment mechanism.

Questions you may have:

How does it work?

In simple terms the vehicles are shown ‘on balance sheet’ since the risk and reward of ownership lies with you as you are buying the vehicle over time.  It is usual for the capital to be repaid over the period down to the anticipated residual value of the vehicle, with this value being payable at the end of the contract. 

At the end of the agreement it can be structured whereby the leasing provider sells the car as agent for you, with the sales proceeds being used to meet the final payment obligation.  Alternatively the leasing provider may guarantee to purchase the vehicle from you for a predetermined value, usually equal to the final payment with the two items being set against each other.  In this case your company may be able to show the assets ‘off balance sheet’ as the risks and reward of ownership are passed to the lease company.

LetsTalkFleet can provide independent impartial advice on the most efficient Fleet Product strategies for your business so please get in touch with any specific enquiries you have, we are available on 0330 056 3335 or via email contact@letstalkfleet.co.uk .

Cashflow

The cost of financing the vehicle is spread over the contract period, cashflow is improved as no large capital outlay (as with outright purchase) is required.

Cost Of Finance

This is fixed at the start of the contract, helping you plan for the future with more certainty.

Budgeting

Monthly rentals are fixed for the duration of the contract, helping to manage costs over a long period. If ownership is taken at the end of the contract then a balancing charge or credit may be made if the vehicle sales value does not equal the balloon charge.

Flexibility

Setting a fixed duration and mileage at the start of a long rental period can be difficult. Typically Contract Purchase arrangements will allow you to re-evaluate your contracted mileage and / or duration to align more accurately to the parameters your business requires, contract terms can then be adjusted accordingly.

This will result in an amended rental charge to take account of your revised contract terms. The ability to rewrite the contract and the methodology used will be dependent on the lessor.

VAT Recovery

VAT Recovery - If your cars are used for any element of private use however small that may be, NO Input VAT will be recoverable on the purchase price. No input VAT is chargeable on the finance rental. Where the vehicle is used solely for business purposes with no private use whatsoever then up to 100% of the input VAT on the purchase price is recoverable.

For vans 100% of the input VAT can be recovered on the purchase price. For all vehicles 100% of the input VAT relating to ancillary services / maintenance charges will be recoverable as this does not vary by acquisition method. The actual VAT recovery position will also be dependant on the VAT status of your organisation.

Residual Risk

Risk and reward associated with the value of the vehicle at the end of the period of ownership is retained by yourself. In this case you are not protected from any adverse movements in the used vehicle market. However in certain circumstances a Contract Purchase agreement can be structured in a way that all vehicles are sold back to the leasing company at a pre determined balloon value ( Residual Value) thus transferring the residual value risk back to the leasing company.

Tax Deductible Expense

Corporation Tax - Capital Allowances claimed by yourself.

Vehicle Management and Administration

It is typical that the management and administration (in full or part) associated with this acquisition method is provided by a specialist Fleet management company / finance company, allowing you to free up internal resources to focus core business activities.

Early Termination Costs

Early Termination Costs - there are varying formats for calculating charges in the event that a vehicle is returned prior to the agreed contract end date. In a simple form early termination charges may be expressed as a percentage of outstanding rentals (Typically 40 or 50%).

In some circumstances these costs may reflect the actual market adjustment required to cover costs associated with the early return of the vehicle and may include additional costs levied by the lessor to recover their fixed service costs.

Excess Mileage and Damage Charges

Excess Mileage and Damage charges - when a fixed monthly rental is calculated upfront the services charged for and depreciation recovered in the finance rental is based on the contracted mileage and assumed return condition at the end of the contract.

If your return mileage is greater than the contracted mileage or the return condition is below the industry standard for a vehicle of similar age and mileage than additional charges will be levied to compensate the financing company. (these charges should reflect market conditions and therefore would be in line with other acquisition methods, however depending on the finance company may include some form of incremental administrational charge or penalty).

Option To Own The Vehicle

Payment of the final balloon charge at the end of the contract would transfer full ownership, however agreements can be structured whereby the leasing provider sells the car as agent for you, with the sales proceeds being used to meet the final payment obligation.

Alternatively the leasing provider may guarantee to purchase the vehicle from yourself for a predetermined value, usually equal to the final payment with the two items being set against each other.