Also known as corporate car lease, private car lease or car finance lease UK. This is an ideal funding method for VAT registered companies that wish to handle the administration of their vehicles and have the asset shown on their balance sheet. This maybe either a balloon or fully amortised lease. The former has a larger final payment set at the outset, the latter has the total costs plus interest repaid in monthly instalments over the terms of the lease. Although title remains with the lessor (finance company) the lessee (user) is responsible for selling the vehicle. The disposal proceeds can be funded as a rebate of rentals, though the lessor will keep a percentage of the sale proceeds or a percentage of its original price.
If a balloon is involved then, providing this is repaid, typically no additional charge is levied. As with contract hire, the lessor has been able to reclaim the VAT levied on the purchase price of the new vehicle. This has the effect of making a finance lease rental lower than the equivalent lease purchase repayment. The rental carries VAT. This can be reclaimed by the lessee, although (as with contract hire) the reclaim is restricted to 50% if there is any element of private use.
The rental is based on time but if a balloon is used then the mileage will be important as this will affect the residual value and in particular the quantum of the final balloon payment.
For anyone thinking about contract hiring a car, it's very important to understand what contract hire is — and what it is not — and how it works and if you have any questions no matter how small just give us a call.