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Why contract hire is a smart fleet solution

March 7, 2018

When choosing how to fund your fleet, you have a lot to consider. You want a fleet solution that gives you the best value for money - that's a given. But you also want access to the right vehicles, and as little complexity in managing them as possible.

That's why so many companies opt for contract hire. It's easy to manage and gives fantastic long-term savings and cash-flow benefits - both in terms of VAT incentives, and the capital it releases. This post will take a closer look at its benefits, and help you decide how best to invest in your fleet.

Three big benefits of one simple fleet solution

1. Tax savings and cash flow benefits

Contract hire is a very tax-efficient way of acquiring your fleet. Businesses can usually reclaim 50 percent of the VAT on the finance element and 100 percent of the VAT on the service element of the contract hire rental.

Add to that the fact that if you move from owning vehicles to leasing them, the money you had tied up in a depreciating asset can instead be freed up to go towards other areas of your business.

2. Simplified management

Another benefit of contract hire is that, usually, a significant amount of your fleet management complexity is taken off your hands.

For one, you cut out the paperwork involved in buying and selling your vehicles. And in terms of the rest of your fleet, a huge amount of the administration workload can be reduced too, such as fines admin, the Road Fund License. And with some packages, maintenance, servicing, tyres, breakdown cover, accident management, short term hire requirements and MOTs can all be included as part of the deal. This helps to simplify vehicle care, limit downtime, and increase margins.

All in all, fleet managers can keep admin costs to a minimum - and have more time to focus on other important areas of their job.

3. Newer vehicles (and better value)

There's also the age of your vehicles to consider. If you own your fleet, you have a choice of either running your vehicles until they get old, or selling them on after a few years to buy new ones. This means you run the risk of residual values depreciating at a faster rate than you'd anticipated, or maintenance costs growing higher than you first expected. That's a lot of effort, risk (and cost) to keep your vehicles new.

Contract hire lets you avoid this problem entirely. When your contract is up, you can simply move to new vehicles with no attachement to the previous ones. That means companies tend to replace vehicles more frequently under contract hire, and as a result, their fleets are newer, sleeker and more efficient.

Not only will this save fuel and maintenance costs, it will also help you put your best foot forward when it comes to brand image.

Is contract hire right for you?

To know if contract hire is right for you, it helps to see the actual benefits for your organisation up close.

At Volkswagen Financial Services | Fleet (VWFS | Fleet), we use software created by Deloitte to identify the best way for you to fund your fleet based on your specific circumstances.

It takes into account various factors to create a bespoke recommendation for your fleet, including your key financial parameters, tax rates, and the potential internal rate of return for your investment (i.e. what the capital you free up could do for your organisation).

Don't forget your stakeholders

Over the next couple of years, some important changes will take place in car leasing. One notable example is the upcoming IFRS 16 legislation, which will change the rules about how leased assets are accounted for.

So, if you do think contract hire is right for you and you don't yet have a fleet policy in place, now's a great time to start talking to your team about future plans and implications.

This conversation has to take place across all levels of the organisation, because every department will have different needs and concerns. HR, for instance, will have input into how your lease policy could fit in with an employee benefit scheme. Whereas Finance will be able to offer insight into the potential cost savings - both before and after upcoming legislation.

Together, you then need to decide on a policy that suits your needs: which manufacturers you want to use; what terms and mileage limits you'll need in place and so on. These aren't easy decisions to make unless you know the industry well, so sometimes it helps to lean on the experts a little.

That's where we come in

At VWFS | Fleet, a big part of what we offer is a consultancy service, to help guide you through difficult funding decisions and make sure you find a solution that suits your specific needs.

From helping you identify the best fleet configuration and simplifying management and maintenance, to sharing our insights, expertise, and roadmap for the future, we can help make your journey a simple and successful one.

There are some specific instances where contract hire might not be right (for instance, organisations that can't reclaim VAT, or those that expect more substantial damage to their vehicles over their lifespan). But for the vast majority it's a great way to cut the costs and complications that come with running a fleet.

Get in touch today, and we can discuss your options.