Personal Contract Hire – The Advantages For You

Personal Contract Hire - The Advantages For You

Picture this: you're tooling down the motorway in your luxury car. You know, the one your company provides so you'll look like a big shot and feel compensated for all those nights on the road. Hey, you don't want all those miles on your car anyway, so this is a perk, or so they say. Maybe you even got to pick it out, your favorite colour, all the requisite accessories, including the deluxe CD player you're listening to now. You're driving in style, heading home after a long day of making hay. Waiting for you there is a letter from your accountant. Or maybe the Inland Revenue. And that's when we cue the dramatic music and freeze on a close-up of your mouth, which is open wide in a scream of indignant surprise.

Because you owe the government money! Because you forgot to include £6000 worth of income on your taxes, the fact of which results in you owing about £2500 more in taxes than you'd planned.

And it's all because of that damn company car.

Really.

There's a dark little secret in the company car game that nobody likes to talk about: the equivalent value of the company car you drive, expressed as a monthly amount, is taxable income to you. If the payments or lease on the car total £500 a month, and if your company pays it for you, even if you had no idea this is happening, the amount is considered regular income come tax time. And the tax man cometh whether you or your boss understand the concept - it's called benefit in kind - or not.

But there's a way around this, one that works better for you and has absolutely no downside for your employer - Personal Contract Hire. If you "hire" the car yourself - in other words, if you lease it from an agent who actually owns the vehicle - and your company reimburses you for those monthly lease payments, then the cost becomes a deductible business expense for the company (which is what it was in the former scenario, too, so nothing changes for them), just like any other item on your expense account. And it's a complete break-even for you, because every penny you've spent on the lease is reimbursed via your expense account, canceling each other out. No income, no taxes. And you still get to look cool on the road.

The reasons to lease a car, either through your company or personally, are many and compelling. The trick is to talk your boss into it, and it'll help to remind him that cars leased for employees go on the company balance sheet as assets, improving ratios and borrowing power. But either way, consider this:

- you get to choose the make, model, color and accessories… go ahead, get those 22-inch rims and watch the boss's face light up;

- the monthly payments with Personal Contract Hire are usually lower than with a purchase contract, because only the depreciation over the lease period is financed, and none of it is interest… hey, you're gonna lose that money either way, so you might as well lower your monthly nut;

- the cost of the vehicle, which is the determining factor in calculating those amortized depreciation payments, is often less through a Personal Contract Hire agent because their purchasing power enables them to secure fleet pricing;

- the Personal Contract Hire leases are usually for two or three years, enabling you to change to a new vehicle at the end of each lease period;

- you have flexibility in your payments because a larger up-front deposit can reduce the monthly hit;

- at the end of the lease you just walk away; or you can choose to buy the car for the residual value, which may be less than the market value itself, in which case you can then sell the car for a profit, or just drive it off into the sunset;

- when written in an individual's name, there are no "benefit in kind" tax implications, and if your company does it and then reimburses you, it's a write-off for them and a wash for you… ask your boss if he can spell "win-win proposition," see what he says.

One hidden trap of a personal contract hire, though, is the dreaded mileage clause. Lease contracts specify a maximum number of miles the car can be driven per year, with any excess miles incurring a surcharge upon the car's surrender. If the contract is yours, rather than your company's, you're on the hook for that trip to John O'Groats, so select your mileage plan with care. And, as with any method of payment, the cost of insurance and maintenance (other than what is covered in a maintenance package attached to the lease itself) is borne by the lease holder.

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