But our research has shown that small to medium enterprises (SMEs) have not been quick to take advantage of such an opportunity. When it comes to funding their vehicles and the use of contract hire, the numbers are quite startling.
In large organisations (greater than 500 employees) 72% of companies use contract hire as a method of funding their vehicles. In small companies (five-50 employees), that drops to just 22%, equating to less than one-third of the larger companies.
And in micro fleets (less than five employees), it’s just 6%. Considering that there are so many more smaller than larger companies – around 25 times more, that begs the question – why? Why is it that the perceived advantages are apparently weighed towards larger companies? Or is it, given that the advantages are open to all corporates, that SMEs, or their advisers, have simply not cottoned on to the benefits?
Whatever the truth, all that may be about to change, for several reasons. There are the traditional benefits of residual value risk eradication, budgeted payments, off-balance sheet funding (still in place until at least 2008/10) and fixed interest rate costs. These are all givens.
In addition, there are the VAT benefits. Leasing companies can reclaim in full the VAT on vehicles they’ve purchased for onward leasing. While users can only reclaim 50% of the VAT on the rentals they pay where there is any private use, the overall effect is to substantially reduce the cost of contract hire. In addition, the VAT on the proportion of the rental paid for maintenance and other additional services is fully recoverable.
But the big one, the one that is going to change the way that people look at contract hire is just around the corner. The Government is conducting a review of corporation tax and in particular, as far as our industry sector is concerned, the way that the capital allowances work.
You can understand why the Government is anxious to carry out a number of reforms of the current arrangements. The system is difficult to administer which leads to inefficiencies and extra cost, and does nothing to promote the Government’s environmental objectives. Most of all, the system is unfair.
It’s unfair to contract hire in particular as every vehicle that costs more than £12,000 has a proportion of its rentals permanently disallowed. Put simply, that means that you are unable to claim all of the rentals in your accounts. And the proportion that you can’t claim increases as the cost of the vehicle rises.
In our conversations with the Inland Revenue, who administer this tax, we have found a depth of understanding of the difficulties that we face and a willingness to level the playing field. They have already agreed they will not now transfer the capital allowances to the lessee, these will remain with the lessor, for leases of up to four years on cars.
For commercial vehicles the equivalent period is six years. All this is particularly good news for SMEs as they may not have had the tax capacity to take full advantage of the allowances. The Revenue is noting we are asking for the removal of the £12,000 rental disallowance and is also listening to the new, simpler arrangements we are proposing for pooling cars for depreciation irrespective of their original cost and whether they are purchased outright, leased, contract hire or hire purchased.
Only the fact that capital allowances will substantially remain with the lessor has been agreed, we will continue to lobby for this playing field to be levelled and are optimistic of the outcome.
British Vehicle Rental and Leasing Association