The short answer
Business contract hire is a rental arrangement: the business pays an initial rental and fixed monthly rentals to use a car for an agreed term and mileage, then returns it. You do not own the car. It can suit directors who prefer predictable payments and do not want residual value risk.
How it generally works
The funder owns the car. The rental is calculated largely from the expected depreciation over the term, plus interest and any maintenance package. At the end the car is returned and inspected.
Contract hire vs hire purchase
The key difference is ownership. With hire purchase the business pays toward ownership and can own the car after the final payment. With contract hire, the car goes back.
- Contract hire: return at end, mileage limits, wear and tear charges.
- Hire purchase: ownership at end, business holds residual value risk.
- VAT and tax treatment differ; check with your accountant.
Questions to ask
Before you sign, clarify:
- What mileage is included and what are excess charges?
- What standard of fair wear and tear applies?
- What does early termination cost?
- Is maintenance included or optional?
Limitations and eligibility
- Underestimating mileage can lead to significant excess charges.
- Early termination fees can be substantial.
- Contract hire availability depends on vehicle and business profile.
Map out your options in five steps
Educational comparison, no obligation to enquire.
Frequently asked questions
What is the difference between business contract hire and hire purchase?+
Contract hire is rental and the car is returned; hire purchase leads to ownership after the final payment. Tax, VAT and risk positions differ.
Can I reclaim VAT on contract hire rentals?+
VAT-registered businesses can often reclaim part of the VAT on rentals where there is private use, under HMRC rules. Confirm with your accountant.
Can a director change their car before the lease ends?+
Usually only by paying an early termination charge. Ask for the settlement figure first.
Related reading
Sources
This guide is general information and not tax, legal or accounting advice. Sorbus Finance is a credit broker, not a lender. Finance is subject to status and lender criteria. Review your position with your accountant.