Fleet News

Stability is at the heart of contract hire's appeal

Procuring vehicles through contract hire remains a well proven and popular method of funding for fleets.

It can provide protection and stability against sudden shifts in used vehicle values, while the leasing company takes the risk on the resale value.

The lessee does not own the vehicle but pays to offset depreciation and wear and tear.

The traditional benchmark for measuring fleet running costs of three years/60,000 miles is now less typical in practice, with many seeking to run vehicles for up to four years.

The lessee benefits with a fixed cost, but there will be additional costs incurred from administration or unexpected maintenance.

The number of fleets choosing contract hire has remained steady in recent years although there has been a shift towards longer vehicle replacement cycles.

If a vehicle lease needs to be terminated before the agreed rental period, the customer is likely to incur penalty charges.

Charges may also be made for exceeding an agreed mileage or for any repairs that need to be made to the vehicle at the end of its lease.

As the monthly payments in contract hire are based on an expected value of the vehicle as the end of the term, it means the leasing company gambles on the rate of depreciation rather than the fleet operator.

Although forecasting is quite accurate, sudden changes in the market can have a dramatic impact on the value of defleeted vehicles.

When the recession took hold in 2008, values of vehicles plummeted because retail customers decided not to change their cars and demand fell sharply.

Leasing companies bore the brunt of this shift in values for vehicles at that time, rather than customers.

Outright purchase fleets would have been exposed to the same potential deficit if they had chosen to defleet at that time.

Occasionally, the opposite can happen where a vehicle’s residual value prediction on the used market improves during the term of the lease and the contract hire company will gain.

But for the purposes of stability and cash flow, contract hire would still be the favoured option for many fleets.

Although terms and conditions regarding end of lease recharges are found in every contract, contract hire customers have reported a tougher stance from providers recently, with penalties for damage and refurbishment enforced more thoroughly.

The amount that may be recharged will likely be higher than the cost of the repair.

To ensure the chance of high recharges is minimised, fleets are advised to pay attention to the BVRLA’s fair wear and tear guide, and to take action against drivers who cause damage to help eliminate incidents that would exceed the limits contained within the guide.

Experts suggest that as leasing companies have fallen victim to the effects of the recession in the same way as many other businesses, they have needed to ensure recharges are claimed in full, whereas before there might have been more flexibility.

While this might have been enough to encourage some contract hire users to look at alternative funding methods, there are some who believe a further evolving financial landscape will keep it in focus.

Fleet operators can reclaim 50% of the VAT on the finance element of their monthly rentals and 100% of
any maintenance element, so with VAT having increased to 20% there is a greater incentive to look for tax efficiencies.

The BVRLA is lobbying the Government to increase the recoverable amount of VAT to 70%, so if the campaign is successful, contract hire could become more attractive to fleet operators, potentially at the expense of outright purchase.

While outright purchase has been the dominant method of procuring fleet vehicles, it is possible that there will be a shift in favour of contract hire as a result of these changes.

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