This method of funding is ideal for companies who are unable to fully reclaim the VAT. The main difference between contract purchase & contract hire is that you have the opportunity to buy the vehicle at the end of the contract period. You will be faced with paying a 'balloon payment' at the end of the contract, you then become the legal owner or alternatively you can return the vehicle to the leasing company.
From April 2009, capital allowances & leasing dis-allowances for company cars was set according to the cars CO2 emissions.
A business will be able to deduct 8% of a vehicles depreciating value each year from taxable profits if the vehicle emits more than 131g/km of CO2. For vehicles emitting between 96g/km & 130g/km, a business will be able to deduct 18%. The first year allowance of 100% for car emitting 95g/km of CO2 or less remains in place.
Cars will go into a 8% or 18% allowance pool according to their emissions. When they are sold, the sale proceeds are deducted from the pool but the balance of any remaining value will stay in the pool & will continue to be written down.
Cars can therefore continue to be written down for corporation tax purposes for a number of years after the vehicle leaves the balance sheet.
This method of funding was popular with companies that had expensive vehicles on their fleet (typically in excess of £25k) as it made financial sense to retain ownership, with the changes coming into force in April it may be prudent for a company to consider an alternative method especially if the emissions of the car is going to exceed 130g/km