These schemes, often referred to as ‘structured employee car schemes’ or ‘Employee Car Ownership’ (ECO) schemes, aim to avoid the tax charge on the company car benefit whilst still enabling the employer to continue to prescribe fleet policy.
An ECO scheme is designed to provide the employee with many of the benefits of having a company car, such as the provision of insurance and servicing and a new car on a regular basis, but in a way that does not incur the car benefit charge. Typically an ECO scheme is structured using a leasing company, enabling the employer to facilitate the provision of a car, and a package of services, to the employee at corporate rates. To ensure the car will not be taxed as a company car, ownership must pass to the employee from the inception of the contract, using a credit sale agreement.
To generate savings for the employer, ECO schemes are structured around the payment of tax efficient Approved Mileage Allowance Payments (AMAPs), supported by an additional, taxable, top-up payment to those employees whose annual business mileage means they cannot meet the full cost of acquiring and running the car from AMAPs alone.
The suitability of an ECO scheme
Typically, ECO schemes are introduced as a cost saving measure. Therefore, before deciding whether to implement a scheme, a range of issues should be considered, including:
- is the scheme suitable for all employees?
- how should the scheme be structured?
- what are the employer’s legal responsibilities and obligations?
- the employees’ marginal rate of income tax
- cars’ list prices and their CO2 emissions
- the employer’s NIC rate and VAT recovery position
- the business mileage, which governs the total AMAPs that may be paid, and
- the cost of fuel, which must be offset against the tax free AMAPs
- Car benefit charge: Broadly, the car benefit charge applies when a car is made available for an employee's private use “by reason of the employment” and “without any transfer of the property in it”.
As the employer’s involvement in the establishment and operation of an ECO scheme means the first of those conditions should always apply to an ECO car, to generate the tax savings that ECO schemes rely upon ownership of the car must be transferred to the employee at the outset of the contract.
Normally, to fulfil this requirement ECO cars should be funded by a loan or credit sale agreement because hire purchase or personal contract purchase arrangements only transfer ownership at the end of the contract and the employee may not wish to buy the car outright.
- Administration: To generate savings, employers must optimise the payment of AMAPs, so there is an underlying requirement for detailed business mileage records to be maintained. However, because most employees’ business mileage is likely to vary month by month, the AMAPs payments and taxable top-ups should also vary, making ECO schemes administratively complex. Thus, employers that operate ECO schemes often find it useful to outsource some of its operations to specialist service providers.
- Tax relief: As the title to the car belongs to the employee, the business is unable to recover any VAT and may only claim tax relief available in relation to the payment of AMAPs or any taxable cash payments.
HMRC’s view of ECO schemes
Companies wishing to operate ECO schemes should seek clearance from HMRC to ensure the scheme is structured correctly and the cars will not be regarded as company cars.
Any overpayment of AMAPs must be reported on form P11D and is chargeable to tax as employment income, as is any overpayment of Relevant Motor Expenses which is chargeable to Class 1 NIC in the earnings period to which it relates.
When structured correctly the car benefit charge should not apply, but HMRC has identified several key issues that need to be addressed to their satisfaction to ensure this.
Employers must consider:-
- the price at which the car is transferred to the employee
- the guaranteed residual value at which the employee may sell the car back to the employer
- costs met by the employer, such as insurance, service and maintenance or Vehicle Excise Duty (VED), and
- payments made in connection with the car, and whether these qualify as Mileage Allowance Payments
The future of ECO schemes
Over time, ECO schemes have lost much of their initial popularity with many employers replacing them with traditional company car schemes, either because they were too complex to administer or because the savings available have fallen significantly as the average CO2 emissions of cars has fallen.
Although some employers still successfully manage ECO schemes, nowadays they are more likely to form part of a blended car scheme, being operated alongside a traditional company car, cash allowance and salary sacrifice schemes.