Business Contract Hire

Business contract hire is the UK's most widely used way for a company to run a vehicle it does not want to own. You pay a fixed monthly rental for an agreed term and mileage, the funder keeps the vehicle at the end, and your business carries no resale risk. This page explains how it works, what it does to your tax position, and what changed in January 2026.

How business contract hire works

You choose the vehicle, the contract length and the annual mileage. A funder buys the vehicle and hires it to your company for that term at a fixed monthly rental. Most agreements run two to four years, with an initial rental usually equivalent to three, six or nine monthly payments.

Because the funder has priced the agreement on what it expects the vehicle to be worth when it comes back, the monthly rental reflects depreciation over your term rather than the full value of the vehicle. That is why contract hire rentals are typically lower than the repayments on an agreement that leads to ownership.

At the end of the term the funder collects the vehicle, inspects it against the BVRLA fair wear and tear standard, and reads the mileage. If you are within your allowance and the condition is acceptable, the agreement simply ends.

What changed in January 2026, and why it matters

For years, the standard argument for contract hire was that it kept the vehicle off your balance sheet. That is no longer generally true.

Following the Financial Reporting Council's 2024 periodic review, FRS 102 Section 20 was rewritten. For accounting periods beginning on or after 1 January 2026, the distinction between operating and finance leases has been removed for lessees. Most leases are now recognised on the balance sheet as a right-of-use asset with a corresponding lease liability, and the profit and loss account shows depreciation and interest instead of a straight rental charge.

There are exemptions for short-term leases of twelve months or less and for low-value assets. A three or four-year vehicle lease will not usually qualify for either.

This matters beyond the accounts. Bringing lease liabilities onto the balance sheet changes gearing, and gearing is what bank covenants are often written against. If your company has borrowing facilities with covenants attached, this is a conversation to have with your accountant before you sign, not after.

Two important qualifications. Micro-entities reporting under FRS 105 sit under a different standard and are not affected in the same way. Companies already reporting under IFRS 16 have had leases on the balance sheet since 2019 and see no change. Your accountant can tell you which regime applies to your company. We cannot, and we will not guess.

Contract hire still removes resale risk, still fixes your monthly cost, and still keeps the vehicle out of your ownership. What it no longer reliably does is keep the commitment off your balance sheet.

VAT: cars and commercial vehicles are treated differently

This is the single biggest tax difference between running a car and running a van, and it is worth understanding before you choose a vehicle.

The 50% block on cars exists because HMRC assumes some private use. Proving a car is used solely for business is genuinely difficult, and in practice most company cars sit at 50%. A commercial vehicle carries no such restriction.

One practical point that costs businesses money: if maintenance is bundled into a single rental figure rather than quoted separately, you may lose the ability to reclaim the full VAT on that element. Ask for it to be shown separately.

Corporation tax relief on the rentals

Contract hire rentals are a trading expense, deducted against taxable profits in the year they are incurred. How much you can deduct depends on the vehicle's CO2 emissions.

• Cars at or below 50g/km CO2, which includes every fully electric car and many plug-in hybrids: the full rental is deductible.
• Cars above 50g/km: a flat 15% of the rental is disallowed. You deduct 85%.
• Vans and single-cab pickups: no restriction applies.
• Double-cab pickups: the restriction now applies. See below, this changed in April 2025.

The 15% disallowance applies to the whole rental, which is another reason to have any maintenance element quoted separately. It also applies regardless of how far above the threshold the car sits, so a car at 51g/km and a car at 250g/km are treated identically.

Because contract hire is a hire agreement rather than a purchase, your company does not claim capital allowances on the vehicle. The funder owns it, so the funder claims them. If capital allowances matter to your tax planning, hire purchase or a finance lease may suit you better, and our comparison below sets out the difference.

Rates and thresholds are set by HMRC and change at Budgets. Our company car tax guide carries the current figures and is the page we keep updated, so this page does not repeat them.

Double-cab pickups: the rules changed in April 2025

If you run pickups, this is the most important tax change of the last two years and it is still widely reported incorrectly.

Until April 2025, the test was payload, and it worked the opposite way round to most people's instinct. A double-cab pickup with a payload of one tonne or more was treated as a van, which was the favourable outcome. Anything under one tonne was already treated as a car. That followed the VAT definition, and it is why so many pickups were engineered to land just above 1,000kg.

It made a double-cab a very tax-efficient way to run a vehicle that could also carry the family.

Following the Court of Appeal ruling in Payne and others v HMRC, HMRC changed its position. From 1 April 2025 for corporation tax and 6 April 2025 for income tax, payload is no longer the test for direct tax at all. A vehicle is assessed on its primary suitability. Because a double-cab pickup is equally suited to carrying people and goods, most are now treated as cars no matter what they can carry.

This leaves two different tests running side by side, which is the single most common source of confusion. VAT still uses payload. Direct tax no longer does.

What that means in practice:

There are transitional arrangements, and they are generous. If you purchased, leased or ordered a double-cab pickup before 6 April 2025, the previous treatment can continue until the earlier of disposal, lease expiry, or 5 April 2029. Anything already on your fleet is protected.

This applies to double-cab pickups and to extended, extra, king and super cab variants. A single-cab pickup, with no second row of seats, is still genuinely constructed primarily for carrying goods and remains a commercial vehicle. So does a panel van.

The practical effect: a double-cab pickup is now a considerably more expensive way to provide a vehicle to an employee than it was, and the sums are worth running properly before you order. We will do that with you.

How contract hire compares with the alternatives

Read the detail on finance lease, hire purchase, personal contract hire and personal contract purchase.

If you want the tax treatment of owning but would still like the option to hand the vehicle back at the end, business contract purchase does both. It is the one agreement that gives your company capital allowances without committing you to keeping the vehicle.

When contract hire is the right answer, and when it is not

We would rather tell you this before you sign than after.

Contract hire usually suits you if you want a predictable monthly cost, you change vehicles every few years, your annual mileage is reasonably predictable, you have no interest in owning the vehicle, and you want someone else carrying the risk on what it will be worth in three years.

Contract hire is usually the wrong answer if you want to own the vehicle at the end, your mileage is genuinely unpredictable, you need to keep vehicles for six or seven years, you want to claim capital allowances, or you are buying something specialist that will be modified. In those cases hire purchase or a finance lease is likely to fit better, and we will tell you so.

Excess mileage is where contract hire most often disappoints people. The charge is set out in your agreement, and it applies per mile over your allowance. If your mileage is uncertain, it usually costs less to contract for a higher allowance than to under-estimate and pay the excess. We will model both.

What happens at the end

The funder collects the vehicle, usually from your premises. It is inspected against the BVRLA fair wear and tear standard, which is an industry document you can read in advance and which sets out what counts as acceptable ageing and what counts as damage.

You will be charged for mileage above your contracted allowance, and for damage beyond fair wear and tear. You will not be charged for the vehicle being worth less than expected, because that risk sat with the funder throughout.

We arrange a replacement to arrive as the outgoing vehicle leaves, so there is no gap. That is worth planning eight to twelve weeks ahead on a factory order.

How Intelligent Vehicle Finance arranges it

Intelligent Vehicle Finance is a credit broker. We are not a lender and we do not own the vehicles. What we do is take your requirement, compare it across our panel of funders, and put the options in front of you in writing so you can compare like with like.

We work by telephone rather than by online configurator, because the questions that actually determine the right agreement, your mileage pattern, your accounting regime, whether you want ownership at the end, do not fit neatly into a form. Intelligent Vehicle Finance is also part of Global Vehicle Group, whose brands have funded more than 70,000 vehicles, so behind the personal service sits genuine group scale.

Speak to us on 01752 429950, or request a callback and tell us when suits.

Frequently asked questions

Tax treatment depends on individual circumstances and on rates and thresholds set by HMRC, which can change at future Budgets. This page is general information, not tax or accounting advice. Please speak to your accountant about your company's position. Intelligent Vehicle Finance is a credit broker, not a lender, and receives a commission from the lender or funder when an agreement completes. A trading style of XLCR Vehicle Management Ltd, authorised and regulated by the Financial Conduct Authority (FRN 315268). Subject to status and availability. Reviewed by Stacey Smith, Brand Director, Intelligent Vehicle Finance. Last updated: July 2026.