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Key Features of an Operating Lease / Contract Hire:

  1. No Ownership: The lessor retains ownership of the asset, and the lessee simply pays for its use.
  2. Fixed-Term Rental: Agreements typically last between 12 and 60 months.
  3. Low Monthly Payments: Costs are based on the asset’s usage and depreciation during the lease period.
  4. Maintenance Included: Many agreements cover servicing, repairs, and breakdown assistance.
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Benefits of an Operating Lease / Contract Hire:

  • Lower Costs: Monthly payments are often lower than other financing options since you’re only paying for the asset’s depreciation.
  • Tax Efficiency: Payments are usually deductible as operating expenses, reducing taxable profits.
  • Hassle Free Maintenance: Maintenance packages included in the agreement simplify asset management.
  • No Depreciation Risk: The lessor bears the risk of the asset’s residual value.

Ideal For:

  • Businesses needing flexibility and no long term ownership commitment.
  • Companies looking to lease fleets of vehicles or short term equipment.
  • Organisations aiming to upgrade assets regularly to the latest models.

Operating leases and contract hire agreements are ideal for businesses seeking cost effective, flexible, and hassle free access to essential assets without the financial burden of ownership.

Contract hire cars

Advantages of financing an asset through an operating lease or contract hire agreement

Financing an asset through an Operating Lease or Contract Hire agreement offers several advantages, particularly for businesses or individuals looking to maintain flexibility and minimise financial risks. Here’s an overview of the benefits:

01

Lower Initial Outlay

Minimal or no upfront capital investment is required, preserving cash flow and working capital for other business needs.

02

Predictable Costs

Fixed monthly payments make budgeting straightforward, as all costs (including maintenance, insurance, and servicing in some agreements) are consolidated into manageable amounts.

03

No Ownership Risk

The lessee does not own the asset, meaning they avoid the risks of depreciation and fluctuations in resale value. At the end of the term, the asset is simply returned to the lessor.

04

Up-to-Date Assets

Allows businesses to regularly update or upgrade to the latest equipment, vehicles, or technology without being tied to outdated assets, ensuring operational efficiency.

05

Maintenance and Servicing Included (Contract Hire)

Many contract hire agreements include maintenance, servicing, and repairs, reducing administrative burdens and unexpected costs.

06

Tax Benefits

Payments under an operating lease or contract hire agreement can often be treated as an operating expense and deducted from taxable profits. VAT-registered businesses may also reclaim a portion of the VAT on rentals.

07

Preserves Balance Sheet Strength

Since the asset remains on the lessor’s balance sheet, operating leases do not inflate the lessee’s liabilities, maintaining a stronger financial position and better gearing ratios.

08

Flexibility at End of Term

At the end of the lease period, businesses can simply return the asset, avoiding the hassle of selling or disposing of it. This is particularly useful for assets with uncertain future value.

09

Off-Balance Sheet Financing (Historically)

Operating leases may be treated as off-balance-sheet financing under certain accounting frameworks, although this has changed for larger companies under IFRS 16.

10

Reduced Depreciation Risk

The lessor assumes the residual value risk, protecting the lessee from any unexpected drop in the asset’s market value.

11

Access to High-Value Assets

Enables businesses to acquire and use high-value assets that might otherwise be unaffordable if outright purchase was required.

12

Environmentally Friendly Options

Leasing agreements often make it easier to access energy-efficient or environmentally friendly technologies, helping businesses meet sustainability goals without the large upfront costs.

13

Ideal for Short-Term or Temporary Needs

Operating leases are particularly beneficial for businesses with short-term projects or those uncertain about their long-term asset needs, providing flexibility to scale up or down as required.

14

Simplified Administration

Leasing providers often handle administration tasks, such as registration, licensing, and disposal, reducing operational burdens for the lessee.

Who Benefits Most from Operating Lease or Contract Hire Agreements?

  • Fleet Operators: Businesses managing vehicle fleets, such as delivery companies, benefit from regular vehicle upgrades and maintenance-inclusive agreements.
  • Businesses with Rapidly Changing Needs: Companies in fast-evolving industries that require flexibility and regular access to updated equipment.
  • Startups and SMEs: Businesses with limited capital who want access to high-quality assets without a large upfront investment.
  • Tax-Efficient Businesses: Companies looking to optimise tax benefits by treating lease payments as operational expenses.

Key Difference Between Operating Lease and Contract Hire

While both involve leasing an asset, Contract Hire specifically includes maintenance and fleet management services, making it ideal for vehicles and fleets, whereas an Operating Lease focuses on access to the asset without ownership or additional services.