What is business contract purchase?
Contract purchase is a finance agreement for VAT registered companies and businesses that want to own their vehicles but want to avoid the risk of depreciating assets.
How does it work?
A company chooses a brand new vehicle, pays an initial deposit and then continues to pay for the car or van in fixed monthly instalments. With a contract purchase agreement, the monthly finance payments are not subject to VAT. At the end of the contract, the company has the option to purchase the vehicle at an agreed price.
The key features of business contract purchase
- A guaranteed residual value – otherwise known as the balloon payment – is agreed at the start of the contract
- Fixed monthly payments cover the rental of the vehicle, plus any maintenance options if chosen, throughout the duration of the contract
- The monthly payments are calculated by taking the following into consideration:
- The cost of the vehicle
- The contract period
- Agreed residual value to be paid at the end of the agreement
- Mileage allowance (as chosen by you before the start of your contract)
- Any additional options, such as a maintenance package
- At the end of agreement, when all payments have been made, ownership passes to the customer
- Vehicle tax is provided for the first 12 months of the contract
The key benefits of contract purchase for business
- Low initial rental
- Fixed monthly payments to make budget planning easier
- Flexible terms to meet your company’s requirements, with variable contract duration and mileage terms
- The finance company guarantees the resale value of the vehicle at the end of the agreement for a known fixed amount
- Maintenance and other added value services can be included in the contract
- The value of the vehicle can be written down against taxable profits
- If yours is a VAT registered company, you will not have to pay VAT on the monthly finance payments
End of the contract
At the end of the agreement, customers don’t have to purchase the vehicle – it’s just one of the options available. At the end of a business contract purchase agreement, there are three options:
- Hand the vehicle back to the leasing company
- Pay the purchase fee and the final rental amount – that means pay the balloon payment outright and own the vehicle
- Refinance the final rental amount if applicable, subject to credit – that means pay the balloon payment in monthly instalments. At the end of these payments, you own the vehicle