Contract purchase

Contract purchase enables companies to take advantage of the benefits of both ownership and contract hire.

As it is legally a conditional sale agreement under which a company is buying the vehicle, it is treated as on-balance sheet.

Contract purchase enables a company to buy a vehicle on deferred purchase terms by paying fixed monthly instalments over an agreed contract period.

Full ownership of the vehicle is completed with a lump sum, or balloon payment, at the end of the contract based on its residual value.

However, the company can also return the vehicle to the supplier at the end of the contract term.

Businesses choosing to return the vehicle are protected from the residual value risk as the supplier is obliged to buy back the vehicle for a pre-agreed fixed price.

Consequently, the supplier is gambling on whether the company will sell the vehicle back to them and the market price.

Contract purchase offers predictable monthly costs as payment terms are fixed up-front and include maintenance.

It can be  an attractive option for companies which are unable to obtain VAT relief due to their exemption status – for example banks, building societies and professional services organisations – as VAT is not due on the monthly rental and is chargeable  only on the maintenance element of the monthly charge.

Nevertheless, it is estimated that contract purchase represents less than 5% of fleet market finance and therefore remains a niche product.

Finance lease

Finance lease sees a company take the residual value risk on a vehicle and therefore is on-balance sheet.

Companies choosing finance lease can opt to structure their rental payments in two ways:

  • A fully amortised finance lease means the entire capital value of the vehicle is repaid in equal monthly amounts over the contract period with all proceeds from the sale of the vehicle being repaid by the lessor as a rental rebate.
  • Alternatively, finance leases can include a balloon payment at the end of the lease period. The balloon payment will usually be equal to the estimated residual value of the vehicle. As a result, monthly rental payments will be lower.

A maintenance package can also be added.

Experts say that finance lease has few, if any, advantages over contract hire.

However, fleets choosing this option believe that having responsibility for residual values enables them to benefit from strong in-life management of vehicle condition, and also means they do not risk costly end-of-contract charges from leasing companies.

Around 4% of the Fleet News Fleet200 opt for finance lease for all or part of their vehicle funding needs.

VAT treatment of finance leases is similar to that for contract hire with 50% of the VAT on the capital element of the lease recoverable.