What is contract hire?
Contract hire is a long-term van rental with fixed monthly payments, a fixed term and a fixed mileage. You never own the van. At the end of the agreement you hand it back and walk away, or sign a new deal on a replacement.
It is the most common way UK businesses put a van on the road. The trade name you will see on quotes is Business Contract Hire (BCH). Rentals typically run for 24, 36, 48 or 60 months. The funder owns the van, takes the depreciation risk, and sets your monthly figure based on how much value they expect the van to lose over your term.
For the full product page and current rates, see our contract hire page. If you are still weighing up contract hire against the alternatives, the van leasing guide compares them side by side.
How contract hire works, step by step
Contract hire follows a standard six-step flow from quote to handback. The steps below apply whether you are a sole trader or a 50-vehicle fleet.
1. Pick the van and the term
Choose the make, model and spec. Set the contract length in months (24, 36, 48 or 60) and the annual mileage allowance (usually 8,000 to 30,000 miles). These three variables drive the monthly rate.
2. Choose the initial rental
The initial rental is an upfront payment taken with your first month. It is expressed in months: 3, 6 or 9 months upfront is standard. A larger initial rental lowers your ongoing monthly, and the other way round.
3. Credit decision
The funder runs a credit check on the business. Sole traders are usually credit-scored personally. Limited companies are scored on filed accounts, trading history, and director profiles. A clean result comes back within 24 to 48 hours.
4. Order and build slot
Once approved, the van is ordered from the manufacturer. Stock vans deliver in two to six weeks. Factory-order vans can take two to six months depending on brand and spec.
5. Delivery and first rental
The van is delivered to your address. You pay the initial rental on or before delivery, then settle into a fixed monthly payment for the rest of the term.
6. Handback at end of term
A BVRLA-trained inspector checks the van against fair wear and tear guidelines. Any excess mileage or damage beyond fair wear and tear is invoiced. You then order a new van, or walk away.
How monthly payments are calculated
A contract hire monthly payment is built from four numbers: the list price, the expected value of the van at handback, the funder's interest rate, and the running costs if you add maintenance. The depreciation slice, meaning list price minus future value, is the biggest piece.
The equation a funder uses is roughly:
- Monthly = (list price minus forecast end-value + interest + maintenance) divided by the number of months
Things that push the monthly down:
- Shorter terms on models with strong residuals
- Lower mileage allowances (the van is worth more at handback)
- A larger initial rental (less of the depreciation sits in the monthly)
- Popular colours and standard spec (easier to remarket)
Things that push the monthly up:
- Heavy mileage (20,000+ per year)
- Premium trim levels and rare options
- Models with weak residuals
- Four-year terms on vans that depreciate early
- Maintenance inclusive rentals
If you want the apples-for-apples comparison with buying outright or owning at the end, the business van finance guide runs the numbers against hire purchase and outright purchase.
What a maintenance package covers
A contract hire maintenance package covers routine servicing, MOTs, tyre replacement and mechanical wear items on a single monthly payment. It does not cover accidental damage, insurance, fuel, AdBlue, or charges from misuse.
The typical scope on a van maintenance contract:
- Included. Scheduled manufacturer servicing, MOT tests from year three, replacement tyres (with a fair-wear assessment), brake pads and discs, exhausts, clutches, bulbs and wiper blades.
- Included on most contracts. Roadside assistance, replacement vehicle cover if the van is off the road, and collection and return for service.
- Excluded. Accidental damage, insurance claims, glass (often a separate add-on), kerb damage to wheels and tyres, misfuelling, lost keys, and anything caused by use outside the manufacturer's handbook.
Maintenance adds roughly 10 to 20 per cent to the monthly rental on a medium van, depending on mileage and term. The payoff is one bill a month, no garage surprises, and no cash-flow shock from a clutch or set of tyres landing in quarter four.
Should you add maintenance?
Add maintenance if cash-flow predictability matters, if the van is a critical business asset, or if you are running high mileage and expect heavy tyre and brake wear. Skip it if you have an in-house workshop, if you are running low mileage on a short term, or if you prefer to manage servicing yourself through a trusted local garage.
VAT recovery on contract hire
A VAT-registered business can reclaim 100 per cent of the VAT on contract hire rentals for a qualifying commercial vehicle used wholly for business. For a car, the reclaim drops to 50 per cent because of the private-use presumption. This difference is one of the reasons contract hire is so popular for vans over cars.
A few practical points:
- Vans qualify. Any van that HMRC treats as a commercial vehicle (broadly, vans, pickups over 1 tonne payload, and most light commercials) qualifies for the 100 per cent reclaim on the rental.
- Maintenance too. VAT on the maintenance element of the rental is 100 per cent reclaimable on a van.
- Cars are 50 per cent. Double-cab pickups under 1 tonne payload and crew vans that HMRC classes as cars drop to 50 per cent. Check the classification before signing.
- Private use matters. If the van is used for commuting or private trips as well as business, HMRC may restrict the reclaim. Most small businesses show incidental private use only, which does not affect the 100 per cent claim.
- Corporation tax. Contract hire rentals are an allowable business expense, so they reduce taxable profit too. There is a small restriction on cars with high CO2, but not on commercial vans.
Speak to your accountant on edge cases (crew vans, pickups, double-cabs). For the finance side of the product, the contract hire page gives the current rates and terms.
Mileage allowances and excess charges
Your contract hire agreement fixes a total mileage limit for the term. Go over it and you pay an excess mileage charge, typically between 5 and 15 pence per mile plus VAT. Go well under it and you usually cannot claim anything back.
How the allowance is set:
- You pick an annual mileage when you sign (commonly 8,000, 10,000, 12,000, 15,000, 20,000, 25,000 or 30,000).
- The funder multiplies that by the contract term to get the lifetime cap.
- Every mile above the cap at handback is charged at the excess rate printed in your agreement.
Realistic mileage planning
Under-estimating to save a few pounds a month is the most common contract hire mistake. A 5p per mile excess on 5,000 extra miles is £250. At 15p per mile on 10,000 miles it is £1,500. Build in a small buffer above your honest estimate.
If your mileage pattern changes mid-term, most funders will let you re-contract to a higher allowance with a prospective adjustment to the monthly. That is nearly always cheaper than paying excess at handback.
End of term: handback and condition
At the end of the contract you return the van to the funder and a BVRLA-trained inspector checks it against the published fair wear and tear standard. You are charged for anything outside that standard, plus any excess mileage.
The BVRLA Fair Wear and Tear Guide sets the industry benchmark. In plain English:
- Acceptable. Small stone chips on the bonnet and bumper, minor door edge chips, light wash scratches, reasonable carpet wear, small dents under a defined size that have not broken the paint.
- Chargeable. Broken panels, dents over the size limit, torn seats, missing service history, missing keys or locking wheel nuts, broken parcel shelves, paintwork that has cracked, kerbed alloys beyond the standard.
- Mileage. Charged at the agreed pence-per-mile rate for anything over your contracted allowance.
Best practice for a clean handback:
- Book a pre-inspection four to eight weeks before end of term so you can fix issues cheaply in your own workshop or a trusted bodyshop.
- Keep every service stamp and MOT certificate. A missing service book alone can trigger a charge.
- Return all keys, locking wheel nuts, handbooks, charge cables (on EVs), parcel shelves and luggage covers.
- Clean the van inside and out before the inspector arrives.
You cannot buy the van at the end of a contract hire agreement. The funder always takes it back. That is the line that separates contract hire from finance lease.
Contract hire vs finance lease, hire purchase and outright
Contract hire is rental with a fixed handback. Finance lease, hire purchase and outright purchase all give you an ownership route. Pick the one that matches what you want to do with the van after the term.
- Contract hire. Fixed monthly, fixed mileage, no ownership. VAT 100 per cent reclaimable on vans. Hand it back and walk away. Best for predictable costs and newer vans every few years. See contract hire.
- Finance lease. Monthly rental with a balloon at the end. You can buy the van, sell it through an agent and keep most of the proceeds, or hand it back. Useful if you want the option to own without committing upfront. See finance lease.
- Hire purchase. Deposit plus monthly payments. You own the van after the final payment. No mileage limits. Best for operators who keep vans for five years or more. See hire purchase.
- Outright purchase. Pay cash, own immediately. No monthly commitment, full VAT reclaim on the purchase for a qualifying business, and full depreciation risk sits with you.
For a long-form breakdown with worked examples, read the business van finance guide.
Who contract hire suits (and doesn't)
Contract hire suits businesses that want predictable monthly costs, a newer fleet every three or four years, and no involvement in depreciation or resale. It does not suit operators who plan to keep the van for its working life, run unpredictable mileage, or need to modify the vehicle.
Contract hire works well for
- Limited companies that want rentals off the balance sheet and 100 per cent VAT reclaim on vans
- Fleets running two or more vans that value a single monthly bill
- Multi-drop courier, service and utility operations with steady mileage
- Businesses that refresh vans every three to four years on warranty
- Anyone who does not want to be the last owner of a tired van
Contract hire doesn't suit
- Owner-drivers who plan to keep the same van for eight to ten years
- Operators with unpredictable mileage who cannot commit to an annual cap
- Businesses that want to modify the van (racking on contract hire is usually fine, but heavy conversions are not)
- Tight-margin operators where the monthly rental does not work next to a lower-cost hire purchase on a used van
- Anyone who wants equity in the vehicle at the end of the term
Still not sure? Talk to our team. A five minute call is usually enough to rule one or two options out.
Two worked examples
Example A: VAT-registered electrician, 1 van, 48-month contract
Spec: medium panel van, 12,000 miles per year, maintenance package added, 6-month initial rental.
- Initial rental: £1,794 plus VAT (6 x the monthly figure)
- Monthly rental: £299 plus VAT
- Maintenance add-on: £45 plus VAT per month (covers servicing, tyres, MOT)
- Total over 48 months: £18,318 plus VAT across rentals and maintenance
- VAT treatment: 50% of the VAT reclaimable on rentals (assumes some private use), full VAT reclaimable on maintenance
- At end of term: van goes back. No sale, no settlement, no more payments. Next van ordered 6 weeks before handback.
Example B: VAT-registered haulage firm, 3 Sprinter LWB vans, 36-month contract
Spec: three large panel vans, 20,000 miles per year each, pool of drivers, contract hire with R&M.
- Initial rental per van: £1,998 plus VAT (6 x monthly)
- Monthly rental per van: £333 plus VAT
- R&M per van: £58 plus VAT per month
- Fleet monthly total: £1,173 plus VAT (rentals) + £174 plus VAT (R&M) = £1,347 plus VAT per month
- Fleet total over 36 months: roughly £54,500 across rentals and maintenance
- Cashflow benefit: predictable monthly line in the P&L, no surprise MOT bills, no year-4 tyre replacement hit
- At end of term: three vans hand back simultaneously. Ordered 3 months ahead, transition is seamless.
The numbers move with spec, mileage, manufacturer offer of the month and lender choice. We quote across a panel so the figures above are illustrative, not a live rate card.
Frequently asked questions
What is contract hire in plain English?
Contract hire is a long-term van rental. You pay a fixed monthly amount for a fixed term (typically 24, 36, 48 or 60 months) and a fixed annual mileage. The funder owns the van the whole time. At the end you hand it back and walk away, or sign up for a new van on a fresh agreement. It is the most common way UK businesses put a van on the road.
Can I reclaim VAT on contract hire?
Yes, a VAT-registered business can reclaim 100 per cent of the VAT on contract hire rentals for a qualifying commercial van used wholly for business. The same 100 per cent reclaim applies to the maintenance element of the rental. Cars are restricted to 50 per cent VAT recovery due to private-use rules. Double-cab pickups and crew vans depend on HMRC classification, so check the payload and body type before signing.
What happens if I go over the mileage?
You pay an excess mileage charge at the pence-per-mile rate printed in your agreement, typically between 5 and 15 pence per mile plus VAT. The charge is applied at handback against the total contracted mileage for the term, not each year. If you know mid-term that you will overshoot, ask the funder to re-contract to a higher annual mileage. That is usually cheaper than paying excess at the end.
Is maintenance included?
Only if you add a maintenance package to the rental. A standard contract hire quote covers the rental of the van only. A maintenance-inclusive rental adds around 10 to 20 per cent to the monthly and covers servicing, MOTs, tyres, brake pads and wear items. It does not cover accidental damage, insurance, fuel or glass. Many fleets add maintenance for cash-flow predictability; owner-drivers often skip it and service locally.
Can I buy the van at the end of contract hire?
No. Contract hire is a pure rental and the funder always takes the van back at the end of the term. If you want the option to own the vehicle, you need finance lease or hire purchase instead. This is the single biggest feature difference between contract hire and finance lease, and it is the reason fleets choosing contract hire usually order a replacement van rather than keep the old one.
What is the initial rental?
The initial rental is the upfront payment taken with your first month. It is quoted in months, usually 3, 6 or 9 months upfront. A nine-month initial rental lowers the ongoing monthly, while a three-month initial rental keeps more cash in the business but raises the monthly figure. It is not a deposit in the legal sense: you do not get it back at the end and it does not build any equity in the van.
Ready to talk contract hire?
Talk to our team in Porthcawl about the van, the term and the mileage that fits your business. We supply contract hire across the UK with free delivery, and we will run the numbers against finance lease and hire purchase so you can see the trade-off.
Useful next steps:
- Browse our contract hire options
- Compare against finance lease
- Read the van leasing guide
- Work through the business van finance guide