Contract purchase is a low-risk alternative to contract hire for VAT registered companies wishing to run quality vehicles without losing the value of their assets. It is a versatile option that offers businesses a variety of options for vehicle purchase, both for the duration and at the end of the contract. Unlike hire purchase, business contract purchases hold back a proportion of the vehicle’s value until the termination of the contract.
A contract purchase agreement waives the VAT that is normally applied to monthly payments for a vehicle. A company will put down an initial deposit and then pay fixed monthly instalments that typically continue for 24 or 48 months. At the end of the contract, the company can opt to purchase the vehicle for an agreed price, which is known as a ‘balloon payment’, or decide to return it at no further cost, provided it has not exceeded the agreed annual mileage and is in good working condition.
What are the benefits?
There are many benefits associated with business contract purchase for VAT registered companies. In terms of the financial benefits, initial deposits can be low, while fixed monthly payments assist with precise financial forecasting. Depreciation risks are eliminated as a result of the balloon payment, which is agreed at the start of the contract, and VAT is only payable on service options.
Contract purchase agreements are considered as a purchase by the business for tax purposes when the vehicle is used. The capital allowances can be claimed against taxable profits, in accordance with current legislation.
With a contract purchase, businesses can ensure their staff are never without vehicles. Rental periods can be flexible to suit different business needs, ranging from 12 months to several years, and an exit from the contract is always an option on payment of a fixed charge.
Will a contract purchase suit my business?
Contract purchase is an ideal solution for businesses that wish to run high-value vehicles without risking their depreciation in value, thanks to the balloon payment agreement. At the end of the contract, the ownership is automatically transferred to the business if all the terms have been met, unless the company opts to return the vehicle without further commitment. If the market value turns out to be worth more than the depreciation amount initially agreed, businesses can often reclaim the difference and use it as a deposit for another lease.
Contract purchase is a much more flexible solution than traditional hire purchase agreements for most businesses, particularly those that place significance on owning high-end, low annual mileage vehicles for staff use. Any vehicle purchased under this type of contract is required to be covered by fully-comprehensive insurance, is considered owned by the company and will show up on balance sheets.
Contract purchase is available to financially eligible limited companies, sole traders and partnerships, and is particularly well-suited to VAT registered businesses as a result of the associated VAT benefits.
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