Funding Methods - Contract Purchase

Funder assumes risk.
This is the only way for companies to buy vehicles without assuming any residual value risk. It involves a leasing company guaranteeing that the vehicle will achieve a pre-agreed value on disposal at the end of the contract.

How it Works:

The risk in the purchase is eliminated and monthly payments cover depreciation over a set period plus a funding charge, giving similar cashflow benefits to Contract Hire . The only difference in the payment cycle is that under Contract Purchase, the user pays the leasing company a lump sum at the end - and gets a cheque for the same amount back in the next post. This is a technical transfer of ownership.

Advantages:

Ø Combines the tax advantages of Outright Purchase , with the cashflow and operational benefits of Contract Hire.

Ø Can also incorporate a service agreement to include maintenance, temporary vehicles and accident management.

Disadvantages:

Ø VAT is not recoverable unless the vehicle is for 100% business use.

Summary:

The fact leasing companies will be able to reclaim input VAT on Contact Hire cars significantly increases the threshold at which Contract Purchase becomes more tax efficient. Nevertheless, this can be a useful acquisition method for vehicles over £20,000.