Business Contract Hire Explained: A Guide for Scottish SMEs

What BCH actually costs, how the tax works, and whether it's the right fit for your fleet

Business Contract Hire Explained: A Guide for Scottish SMEs

If you're looking into vehicle leasing for your business, Business Contract Hire (BCH) is very likely the option you'll keep coming back to. It's the most common way UK companies fund cars and vans, but the details of how it actually works, and where it fits against alternatives like salary sacrifice, often get glossed over. Here's a proper breakdown.

What is Business Contract Hire?

BCH is a long-term rental agreement between your business and a leasing funder. You choose a vehicle, agree a contract length and annual mileage, and pay a fixed monthly rental for the duration. At the end of the term, you hand the vehicle back, there's no ownership, no resale to arrange, and no depreciation risk sitting with your business.

The vehicle sits on the funder's balance sheet throughout, not yours. That distinction matters for how the costs are treated financially, more on that below.

How are the monthly payments worked out?

Three things drive the monthly cost: the vehicle's on-the-road price, the contract length (typically 24, 36, or 48 months), and the annual mileage allowance. Longer contracts and higher mileage both generally reduce the monthly cost, since the funder is spreading the vehicle's depreciation over more months or more miles, though the trade-off is less flexibility if your needs change partway through.

Optional extras, metallic paint, maintenance packages, towbars, can also affect the price. Some of these show up as selectable options when a quote is built, others need to be costed in separately, worth asking your broker for the full picture rather than just the headline monthly figure.

What are the tax and VAT benefits?

For VAT-registered businesses, this is where BCH often becomes the more attractive route compared to buying outright.

• VAT recovery: 100% of the VAT is recoverable on vans with no restriction. On cars, it's 50% recoverable if there's any private use, which covers most real-world situations.
• Lease rental as a business expense: your monthly rental is treated as an allowable business expense, though for cars with CO2 emissions above a set threshold, 15% of the rental is disallowed for tax purposes. Low and zero-emission vehicles avoid this restriction entirely, one of several reasons EVs are increasingly the default choice for BCH fleets.
• No capital allowances for you: because the funder owns the vehicle, you don't claim capital allowances on it yourself, that sits with them. What you get instead is the simplicity of a fixed monthly cost that's mostly deductible.

This is general guidance rather than advice for your specific situation, always worth checking against your own accountant's view before deciding.

BCH vs salary sacrifice: which is right for your business?

These solve different problems and often work best used together rather than as a straight either/or.

BCH suits vehicles the business itself needs, pool cars, vans, vehicles tied to specific roles. The saving sits with the company through VAT treatment and the expense deduction.

Salary sacrifice suits vehicles provided as an employee benefit, funded through the employee's own pre-tax salary rather than a business budget line. It works best for staff who'd be leasing a car personally anyway.

Many of our Scottish SME clients run both, BCH for the operational fleet, salary sacrifice as an employee benefit on top. We've covered the comparison in more detail in a separate guide if you want the fuller picture.

What happens at the end of the contract?

You hand the vehicle back to the funder, subject to fair wear and tear and staying within the agreed mileage. Go over the mileage allowance and there's typically an excess mileage charge, calculated per mile over the limit. Damage beyond normal wear can also incur charges, assessed against the BVRLA's fair wear and tear standard, which is a recognised industry benchmark rather than something funders set arbitrarily.

Most businesses simply replace the vehicle with a new lease at this point, keeping the fleet current without ever owning ageing assets.

Why use a broker instead of going direct to a funder?

A broker works across multiple funders rather than being tied to one. That matters because pricing varies meaningfully between funders for the same vehicle, and a business going direct to a single manufacturer or funder is only ever seeing one number, not the best available one.

At Kinetic, we quote across our whole panel, Arval, Lex Autolease, Ayvens, Novuna, Santander, Drivalia, Mobilize, and VWFS, and because we work at volume across that panel, we're often able to access pricing an individual SME wouldn't get going direct. We're also FCA-regulated and BVRLA-registered, so you're getting advice within a regulated framework, not just a sales conversation.