6 steps to better… Contract Hire
1. Understand the tax incentives
Sourcing a fleet through contract hire can have significant economic advantages for a business over outright purchasing of assets. Vehicles under contract hire are classed as a business expense and as such are not currently required to appear on the company balance sheet. This means that the business can avoid having depreciating assets on its books that it has to write down each year, minimising payouts.
Contract hire can also provide VAT and tax advantages for fleets that choose not to outright purchase; “For company cars with private use, contract hire provides the opportunity to recover up to 50% VAT on finance, whereas there is no VAT recovery under outright purchase,” explains Paul Lippitt, principle consultant for Lex Autolease.
2. Duty of care obligations
Contract‐hired vehicles are typically run for two or three years, meaning they are likely to be newer and better maintained than grey fleet vehicles, which are typically seven years old. Leased vehicles are also likely to be significantly more fuel efficent and offer improved safety equipment such as ABS and full airbag coverage that may be absent from older models. Selecting vehicles specced with modern safety features can help to demonstrate corporate social responsibility initiatives and ensure drivers feel supported out on the road.
“Knowing that staff are in efficient, well maintained and appropriately insured vehicles is crucial in meeting Health and Safety obligations as an employer,” comments Carlos Montero, commercial director at FleetEurope.
“Provision of a company car on contract hire is preferable to grey fleet drivers running their own cars as risks can be reduced and costs controlled.”
3. Avoid unexpected charges
There are lots of different types of lease, but in essence they tend to revolve around the same principle; that of a fixed monthly fee that ultimately equates to the value of the vehicle being leased, plus a little interest.
“One key element for fleet managers to understand about leases is contract amendments and early terminations,” warns Matthew Gardiner, regional sales manager for Hitachi Capital Vehicle Solutions.
“If something changes outside the terms of the agreed lease, for example the mileage goes beyond what was originally agreed, there will be financial penalties. Therefore, fleet managers should make sure that any commercial implications of changes to the terms of the lease are clearly defined at the start of the contract. Of course, any reputable leasing company will want to work closely with its customers to ensure contracts operate in the most cost efficient way.”
4. Undertake a whole-life cost analysis
Simon Staton, director of client management at Venson Automotive Solutions, suggests that a whole‐life cost comparison be carried out as part of the decision making process when selecting a vehicle for contract hire: “Whole‐life costs reflect all the projected, vehiclespecific costs associated with operating a vehicle over its fleet life. If the vehicle is contract hired, then the rental will normally include the depreciation, funding, service, maintenance and repairs and VED. Costs can be shown as per annum, per month, or per mile.
“Two similarly priced cars from two distinct manufacturers may have an identical list price, but be hundreds of pounds apart in whole‐life costs over the benchmark three‐year/60,000 mile fleet operating cycle. Multiply that ‘wrong’ decision across a 100‐vehicle fleet and the costs will be huge.”
5. Decide whether to opt in for SMT coverage
Including a service, maintenance and repair (SMR) element in a contract hire agreement can remove this administrative burden from the fleet manager, and enables the provider to use its buying power and the promise of repeat business to negotiate the more costeffective rates possible for its clients.
Fleet managers who prefer to fulfil SMR requirements themselves will need to consider the scale of the task, dependent on the number of vehicles on their fleet.
There can be advantages to dealing with SMR costs in‐house, as this can enable the fleet to monitor vehicle condition in realtime and larger fleets may even have their own workshops on‐site where vehicles can be maintained. If managed poorly, managed poorly, however, organisations could end up paying retail prices for SMR, and the operation may well prove more costly than outsourcing.
6. Educate staf to reduce charges
The contentious issue of end‐of contract vehicle damage charges could be improved by driver education and better communication between drivers and hire firms. So says Zenith Vehicle Solutions’ commercial director, Ian Hughes, speaking at a recent ACFO seminar: “During the fleet life of a vehicle there are a number of opportunities to assess vehicle condition, but there are too many times where that is compressed into the last four months of a contract.
“There needs to be pro‐activity in management of vehicles and that means mid‐life notification of damage and prereturn inspections. Fleet managers and
ourselves should perhaps carry out random condition checks in company car parks; employee workshops could be held to explain policy and procedures and an appraisal of vehicle condition should be part of an employee’s annual review.”
CASE STUDY > SPIE UK
Reducing environmental impact
Specialist provider of electrical, mechanical and engineering services, SPIE UK, signed a sole supply partnership with ALD Automotive in June 2015 to cover a fleet of over 1,000 vehicles, comprising a third cars and two‐thirds LCVs.
During implementation, ALD Automotive worked with SPIE UK to develop a new vehicle policy that offers increased vehicle choice along with a focus on a more cost‐effective proposition for drivers. This included a move to using total cost of ownership (TCO) for vehicle selection, which provides the group with a more detailed overview of vehicles’ costs across their lifetime on the fleet.
Moving to a TCO‐based policy also enables SPIE UK to weigh up the benefits of ultra‐low emission vehicles. In line with the group’s eco focus, the new choice list includes CO2 caps on all vehicles as well as a number of hybrid models, the first of which will be three Mitsubishi Outlander Plug‐in Hybrids.
The contract hire partnership with ALD incorporates a number of other services, including accident management as well as ALD’s PoolFleet Solutions product to offer a flexi‐lease programme for new starters and Rental Solutions to provide flexible short‐term rental.
Commenting on the partnership, Pat Nolan, fleet manager at SPIE UK, said: “We are looking to deliver significant savings to the business, improve our driver road risk and reduce our fleet’s CO2 emissions. The timescales for this are challenging and ALD have helped develop our plans, supported us where we struggled and continue to drive through the changes into the business.”