Contract hire vs finance lease

The four ways a UK business can put a van on the road

Almost every commercial vehicle deal in the UK is one of four things. Contract hire — a fixed-term rental; you use it, you hand it back, the lessor owns the resale risk. Finance lease — you rent it too, but the vehicle's end value is your problem: at the end you either sell it as the lessor's agent and keep most of the proceeds, or extend on a nominal "peppercorn" rental. Contract purchase — you are buying, with a fixed future value set at the outset that you can either pay or walk away from. Outright purchase — cash or a loan; you own it from day one and everything that follows, good and bad, is yours. The right answer turns on one question more than any other: do you want the vehicle's residual value risk, or do you want it off your desk?

Contract hire vs finance lease vs contract purchase vs purchase

Contract hire in detail: paying for use, not for an asset

You agree a term and an annual mileage, pay an initial rental and then fixed monthly rentals, and hand the vehicle back. Vehicle excise duty is included for the term; maintenance is an optional element priced separately. Because the lessor sets the rental against an estimate of what the vehicle will be worth at hand-back, you never find out whether that estimate was right — a collapse in used van values is our problem, not yours. The trade-offs are real and worth naming: you are committed for the term, ending early costs money, you must return the vehicle in fair condition, and you must be honest about mileage upfront or pay excess later. In exchange you get one number per vehicle per month that you can put in a forecast and rely on. Full mechanics in business contract hire explained.

Finance lease in detail: you carry the end value

A finance lease also rents the vehicle to you, but the economics are reversed. Rentals are structured either to repay the full cost over the primary period, or to leave a balloon so the monthlies are lower. At the end you have two routes: sell the vehicle to a third party as the lessor's agent, in which case your business keeps the large majority of the sale proceeds as a rebate of rentals; or move into a secondary period on a nominal annual "peppercorn" rental and keep using it. You never take title, but you carry the value risk both ways — a strong used market rewards you, a weak one costs you. Finance lease earns its place on specialist and converted vehicles: tippers, refrigerated bodies, welfare units, anything with a bespoke build you may run for six or eight years. It rarely beats contract hire on a standard panel van replaced every three.

Contract purchase and outright purchase

Contract purchase is a purchase agreement with a fixed future value set at the outset: fixed monthly payments, then either pay the final sum and own the vehicle or hand it back at that agreed value. It suits a business that wants ownership but not the used-market gamble. Outright purchase — cash or a bank loan — gives total freedom and no mileage limit, and is the only route where an unusually long holding period really pays. The tax route differs: instead of deducting rentals you claim capital allowances. Vans normally count as plant and machinery, so the £1m Annual Investment Allowance is available, and a company buying a new, unused van can use full expensing (gov.uk, Capital allowances, 2026). Cars are excluded from both. Note two Autumn Budget 2025 changes: the main-pool writing down allowance falls from 18% to 14% from 1 April 2026 for companies and 6 April 2026 for unincorporated businesses, and a new 40% first-year allowance for main-rate expenditure applies from 1 January 2026, excluding second-hand assets, cars and assets leased overseas (HM Treasury, Autumn Budget 2025).

Which should your business choose?

Some honest decision rules. Choose contract hire if you replace vehicles every three to four years, want a fixed cost you can forecast, are VAT-registered and running vans, and would rather not run a disposal process — that is most van fleets. Choose a finance lease if the vehicle is specialist or converted, if you might keep it well beyond the primary period, or if your mileage is genuinely unpredictable and excess-mileage exposure worries you more than value risk. Choose contract purchase if ownership matters but you want a floor under the residual. Choose outright purchase if you have surplus cash, keep vehicles for the best part of a decade, and can use the capital allowances. If two look close, model both over the whole holding period rather than comparing monthly figures — the monthly figure is the least informative number in the comparison.

The 2026 accounting change that narrows one traditional difference

Contract hire was long described as "off balance sheet" for the lessee. That is ending. For accounting periods beginning on or after 1 January 2026, amendments to FRS 102 require lessees to recognise most leases as a right-of-use asset and a lease liability, removing the operating-lease distinction; leases of 12 months or less and low-value assets are exempt, and vehicles are not low value (Financial Reporting Council, amendments to FRS 102). Companies already reporting under IFRS 16 have done this since 2019. Practically: if you were choosing contract hire partly for its balance-sheet presentation, that reason is going away, and it is worth checking any lending covenant keyed to gearing. What it does not change is the commercial substance — who carries the residual risk, who does the disposal, and what your monthly cash cost is. Those are still the reasons to choose.

A note on tax and accounting advice

Everything above is general information about how these products work in the UK, sourced and dated, and it is not tax or accounting advice. The right structure depends on your VAT position, your profits, whether you are a company or unincorporated, your accounting framework and how long you keep vehicles. Rates, thresholds and reliefs change at every fiscal event, and several of the figures above changed in the last year. Confirm the treatment with your accountant before you commit, and ask specifically about capital allowances timing and the FRS 102 transition if you report under UK GAAP. What we can do is quote clearly and itemise every element so your accountant has the numbers they need on one page. Ask us for a written quote and take it to them.