During an agreement

The lessee agrees to make regular rental payments to the lessor in accordance with the contract hire agreement and must keep the vehicle fully insured as well as in roadworthy and good general condition.

The lessor may seek to recover some or all of the cost of the Annual Vehicle Excise Duty (road tax) applicable to the vehicle by including an amount for this in the rental cost: this should be included in the terms and conditions set out by the lessor.

Service and maintenance plans are often incorporated into contract hire agreements to provide the lessee with fixed cost motoring. This helps planning and budgeting.

Technical Considerations

The lease will always be shown on the balance sheet of the lessor’s company accounts, but the lessee might also need to include on its balance sheet too. This depends on the accounting standard used by the business customer:
- IFRS 16 – an accounting standard which came into effect from January 2019. The standard requires both lessor and lessee to report all leases of more than 12 month’s duration on the balance sheet. This is to ensure companies better reflect their financial position by showing the “right of use” it has to assets such as vehicles. The standard has mostly been adopted by large multi-national businesses.
- FRS 102 – a UK accounting standard that only requires the lessor to report the lease on its balance sheet and not the lessee. Most small and medium-sized UK businesses continue to use this standard.
Where the lease is not shown on the balance sheet the rentals need to be set out in the notes to the accounts and will be a cost shown in the profit and loss account of the lessee.
If the lessee is VAT registered, the VAT on the rentals can be wholly or partially reclaimed by the lessee depending on the type of vehicle and how it is used:

Commercial vehicle – all of the VAT on the rentals can be reclaimed.
Car – all of the VAT on the rentals can be reclaimed if the car is 100% for business use or 50% if there is any private use.

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