About Contract Purchase

About Contract Purchase

Posted by

Susan Graham

August 2019

Contract Purchase allows you to lease a new vehicle over an agreed period of time and mileage at a fixed monthly cost with the option to own the vehicle at the end of the agreement. A guaranteed residual value will be set at the beginning of the contract to be paid at the end of the agreement, avoiding large drops in value normally associated with owning a new vehicle outright.

You also have the option to include vehicle service maintenance and repairs throughout the agreement period, which means you can budget predictably for all your business motoring. Leased vehicles cannot be used for hire or reward purposes such as taxi or chauffeur services.

When a Business Contract Purchase agreement ends, the following options are available:

  1. Own the vehicle outright by paying the outstanding residual value/purchase fee and using any equity as a deposit for the next vehicle
  2. Return the vehicle to the finance company
  3. Re-finance the final rental – pay the final residual value payment in monthly instalments and own the vehicle at the end
  4. Keep the vehicle for a further 12 months on an informal rental period
  5. Enter into a new agreement (credit dependent)
So what are the benefits of Business Contract Purchase?
  • Low initial deposit and fixed monthly repayments
  • Flexible terms from 24 to 60 months
  • A range of end of contract options
  • Option to own the vehicle at the end of the contract without depreciation risks
  • Includes the “no risk” advantages of contract hire
  • Option to add the maintenance package for the duration of the agreement
  • No VAT paid on monthly finance payments or final residual payment for VAT registered companies
  • Ability to recover capital allowances.
  • Vehicle value can be written down against taxable profits
  • Road Fund Licence costs are included for the duration of the agreement
  • The vehicle is registered in the finance provider name
And what are the potential risks you face?
  • If the vehicle is returned with damage that goes beyond established industry guidelines – known as BVRLA Fair Wear and Tear you may incur charges to repair that damage. View our Fair Wear and Tear Guides for more information
  • The vehicle appears on balance sheets and outstanding payments may show as a liability
  • VAT to be paid on service costs if maintenance is included
  • VAT cannot be reclaimed on business contract purchase
  • If you terminate the lease early, you may be liable to pay an early termination fee
  • If you have driven the vehicle beyond the agreed mileage limit, you will be charged an excess mileage rate which is outlined in your agreement

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