The structure of Contract Hire agreements

Rentals

What do the rentals cover?

The rentals paid to the lessor should cover the depreciation costs of the vehicle over the term of the agreement plus interest, but not the full cost of the vehicle – the lessor will have a residual value risk at the end of the term (similar to a balloon payment).

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Risk

How is the residual value risk calculated?

The amount of the residual value risk (future vehicle value) is set by the lessor and the calculation is based upon a number of factors including the type of vehicle, the primary period of hire and the lessee’s anticipated mileage.

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VAT

What are the VAT implications?

Contract hire rentals are based on the price of the vehicle excluding VAT.
Interest is added to the ex-VAT price of the vehicle and the balance, less the leasing company residual value risk / balloon payment, being paid over a fixed period.
The rentals will attract VAT at the current rate.

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Payments

Deposits are not taken, however Advance Rentals are usually paid at the start of the agreement. The exact amounts are normally agreed by the lessor and lessee but 3 advance rentals are most common.
The payments are based on the price of the vehicle, the term of the lease and mileage.
The rentals during the remainder of the Primary Period of Hire will be `spread` equally over the term or there may be a `terminal pause` (see Finance Structures section).
All the rentals will attract VAT at the current rate.

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Fees

Lessors may charge additional fees, such as arrangement fees. However, this is less common than in purchase agreements such as HP.

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