Friday 19th Oct 2018
Over recent years, an increasing number of fleets have moved from Outright Purchase to Contract Hire as a way of funding their vehicles. A move to a funded fleet can often free up thousands, if not millions, of pounds in cash flow. However, it is a big change for any business, and there are many reasons why some are reluctant to switch.
In this post, we look at some of the more common of these reasons and seek to dispel the myths.
“It’s how we’ve always done it”
The fleet market moves quickly, often with unforeseen changes in taxation and legislation, meaning that businesses should review their funding method every few years, whether the outcome is to change or not. What was previously cost-effective may no longer be. With products and ancillary services changing to meet new rules and regulations, you really could be missing out on a great opportunity that wasn’t previously available.
Since 1995 businesses have been able to reclaim up to 100 per cent of the VAT on Contract Hire vehicles, reducing the cost of Contract Hire compared to Outright Purchase. Since 2009 businesses have been able to offset all of their Contract Hire Rentals against their profits (subject to CO2 restrictions), whereas this was previously only available for vehicles with a list price under £12,000. Both of these changes made Contract Hire more cost-effective.
"I prefer to own them”
While there may be a perceived benefit to owning vehicles, they can actually be more of a liability than an asset to your business. The used vehicle market has been buoyant for a number of years, but industry bodies such as CAP are claiming that, with recent over-supply in the new car market, values are starting to soften. With Contract Hire, the risk on the resale value is carried by the supplier, so your company won’t lose any money if used values decline faster than expected.
"I have been bitten before by end-of-contract charges”
End-of-contract damage has typically been a challenge in the Contract Hire industry, prompting the widespread adoption of the BVRLA’s Fair Wear and Tear Guidelines. End-of-contract damage costs should broadly represent the reduction in value you would expect on your owned vehicles if you sold them with damage. Leasing companies will usually include a damage waiver as standard to cover the odd scratch that is outside of the guidelines, but where the vehicle is otherwise well looked after.
Hitachi Capital Vehicle Solutions offer Profit Share as standard. This ensures total transparency from the funding provider by sharing back any profits made on the disposal of the vehicle at the end of the contract, and any under spend on maintenance.
“I like the flexibility of Outright Purchase”
The idea that leasing ties you down and offers no flexibility is rather misplaced. In fact, leasing could provide even greater flexibility than a purchased fleet. Not only can products and services be tailored to suit your corporate agenda and your drivers’ needs, but you can also benefit from flexibility with your vehicles. For instance, if your drivers start to do higher mileage than the mileage pool allows, contracts can be rewritten to make sure they don’t go over. If it is deemed necessary to keep vehicles for a bit longer, contract extensions can be written, often at a reduced cost. If a driver leaves and a vehicle needs to be disposed of, they can either be refurbished and delivered to another driver, reallocated elsewhere within the leasing company’s customer base, or terminated at cost – which should be better than, or equivalent to, your own cost of disposal.
“We have the cash and don’t want to pay interest”
While your business may be cash rich, and it’s true that Contract Hire payments attract interest, the opportunity cost of capital can far outweigh this. 100 vehicles at £20,000 each is £2 million that could be used to recruit and train staff, invest in production facilities, increase stock or otherwise grow your business.
With increased buying power thanks to Hitachi Capital’s manufacturer relationships, the enhanced VAT reclamation abilities of Contract Hire, and Account Managers and Consultants on hand to help with policy advice and cost management, the interest payments could be far outweighed by the money saved in other areas.
You can also alter your payment profile to make more payments in advance, thus reducing your interest payments.
Summary: The benefits of contract hire for fleets
- Contract Hire is generally the most tax efficient way to run a company car fleet – newer, cleaner vehicles with lower NIC costs, taking advantage of lower taxation for off-balance-sheet asset
- Frees up capital to invest in the business
- Reduction in risk for your company – the leasing company absorbs any loss in resale value or overspend on maintenance
- Fully budgeted operating costs – no unexpected or out-of-pocket maintenance bills
- Flexible – allowing vehicles to be recontracted, reallocated or disposed of at actual cost
- Profit Share – a commitment to fairness and transparency by sharing any profits made on resale. On average, this has equated to £265 per vehicle.
- Pooled Mileage – eliminating the risk of an excess mileage charge by pooling your company’s mileages together
Real World Case Study
At Hitachi Capital, we recently worked with a prospective client to advise them on the best way of funding their 300-vehicle car and van fleet. Our Consultancy team analysed all areas of their fleet, including fuel costs, taxation, their drivers’ expectations, and the differences between acquisition methods.
The client’s existing model was to Outright Purchase used vehicles at 12 months old and then to run them for 5 or more years. According to our analysis, this meant that the majority of their fleet was being retained past its optimum operating cycle, resulting in disproportionate maintenance costs, as well as higher fuel and NIC bills. Their experience of buying used vehicles, and trying to accommodate drivers’ desired specifications, was also labour-intensive, complex and costly.
We found that changing from this model to a Contract Hire model with Whole Life Cost would save around £1.4 million over 4 years. It would also result in an improved service and brand-new vehicles, offering more control over running costs. This comparison utilised the company’s own internal Rate of Return calculations.
Furthermore, replacing their existing model with a blended Contract Hire, Salary Sacrifice and Personal Leasing proposition from Hitachi Capital would result in the client saving over £2 million over a 48-month contract cycle, and their drivers saving over £1.1 million in tax and fuel costs over the same period, while enjoying brand-new cars as opposed to used ones.
The client was also able to implement the ability for all their drivers – whether eligible for a company car or not – to get access to a new, tax-efficient car in a way that reduced the client’s risks.