WHAT IS AN EMPLOYEE CAR OWNERSHIP SCHEME?
Employee Car Ownership Schemes (ECOS) are an alternative way for organisations to provide their employees with the benefit of brand new, fully serviced cars.
From a driver’s perspective, they look and feel very much like a regular company car but there are some important differences in the way that the schemes work.
Employee Car Ownership schemes differ from other forms of employer car benefit provision in one fundamental way: the finance structure used means that the car is legally owned by the employee from the outset of the agreement.
As the employee is the legal owner, they are insulated from Benefit in Kind (BiK) tax on the value of the vehicle benefit.
In this way, Employee Car Ownership (ECO) schemes can provide a highly attractive benefit which can assist in the hiring and retention of staff, as well as providing a means for employers to potentially save money against a traditionally funded company car. This is particularly the case where employees are driving significant business mileage.
These schemes are usually called a Structured Employee Car Ownership Scheme or SECOS, and as with a company car scheme, employers are able to determine which employees have access to the scheme and the breadth of vehicle choice that they have.
Alternatively, the scheme can be opened up to all employees maximising the recruitment and retention benefits, usually called an All Employee Car Ownership Scheme or AECOS. As these scheme do not seek to replicate a company car (as in a SECOS) business mileage is not usually a determining factor when considering eligibility for an AECOS
Cars under all ECO schemes are provided with a full range of additional services including maintenance and servicing, breakdown cover and even insurance.
HOW DOES ECO WORK?
ECO schemes are usually set up with the help of a specialist partner, like Maxxia, who will arrange funding, source vehicles and provide the opportunity to outsource some or all of the management of the fleet.
By doing this, the organisation not only benefits from their partner’s expertise in the implementation and management of ECOS, but employees also benefit from the significant discounts that the partner will be able to achieve on the price of new vehicles.
Two of the most critical aspects of ECO schemes are the treatment of Benefit in Kind Tax and the use of AMAP rates, see more below:
Benefit in Kind (BiK) Tax
As mentioned, to ensure that Benefit in Kind tax is not payable, ownership passes to the employee from the start of the contract, using a credit sale agreement.
Unlike other forms of funding such as Contract Hire or Contract Purchase the use of a credit sale agreement ensures that there is transfer of ownership.
Approved Mileage Allowance Payments (AMAPs)
Where there is business use, ECO schemes use Approved Mileage Allowance Payments (AMAPs) to help fund the cost of the car. The tax free AMAP rates are intended to cover the costs of fuel, oil, servicing, tyres, road fund licence, insurance and depreciation, which is allowed by HMRC when using a private car. These are significantly higher than the Advisory Fuel Rates used to reimburse company car users.
AMAPs are paid to the employee monthly, with the addition of top-up payments when the business mileage of the employee is not sufficient for the AMAPs (less the actual cost of the fuel) to cover the cost of the vehicle. This means that the amount of allowance paid to each employee varies on a monthly basis.
AMAP rates for cars and vans for the 2017/18 tax year are:
- 45 pence for the first 10,000 business miles in a tax year
- 25 pence for each subsequent mile
Until recently, employers did not pay NI contributions on the value of the AMAPs, and employees were not liable for income tax on them. Following the 2017 Finance Bill, car schemes deemed to be Optional Remuneration Agreements (OpRAs) have had these tax benefits removed. However, significant cost savings can still be made through a properly implemented SECOS.
Find out how an Employee Car Ownership Scheme
could help your organisation
WHAT ARE THE BENEFITS OF ECO SCHEMES?
In addition to the benefits already outlined above, ECO schemes provide a wide range of additional advantages to organisations and their employees.
ECO schemes carry few risks for the employer as the contract is with the individual. Scheme design can protect all parties from the impact of changes in circumstances.
Employers can choose to control the type, and range of choice, of vehicles available through the scheme. This can make transitioning from a traditional company car scheme to a SECOS a smooth process.
By providing drivers with new and regularly serviced vehicles, employers are able to manage their duty of care responsibilities more effectively than through the provision of cash allowances. By reducing reliance on the ‘grey fleet’ organisations can significantly improve the overall safety performance of their fleet.
In a similar way, through the provision of new, more efficient vehicles, organisations can improve their environmental credentials as well as controlling fuel costs more effectively.
With a well structured scheme, and the right specialist partner, employers will not have to undertake any P11D reporting.
As cars within an ECO scheme are owned by the individual rather than the employer they are not required to be reported on the company balance sheet.
Corporate discounts are available on the price of each new vehicle, typically delivering savings of around 15-30% off showroom prices.
- Schemes provide drivers with many of the advantages of a fully expensed company car such as inclusive servicing, maintenance and breakdown cover.
Individuals do not need to provide a deposit or initial payment for the vehicle. Most personal car finance plans, such as personal contract hire or personal contract purchase, require an up-front payment of between one and three months’ rental value.
Depending on the policy adopted by the employer, the employee may have significantly more choice in selecting a vehicle than they would in a traditional company car scheme. This may also include the option to trade up or down.
As no Benefit in Kind tax is payable on the vehicle, the employer is protected from HMRC’s regular increases in tax rates.
At the end of the contract the employee has the option to make a final payment and keep the vehicle, or to sell it back to the funder at a guaranteed price – in effect this means that the vehicle is simply handed back. This also means that the individual is able to choose a brand new vehicle every few years.
WHAT SHOULD BE CONSIDERED BEFORE CHOOSING AN ECO SCHEME?
While Employee Car Ownership schemes work well for many organisations, there are some factors that should be considered before choosing this over other vehicle funding methods.
The Importance of AMAPs within a SECOS
To generate the greatest savings, employers must optimise the payment of AMAPs, so detailed business mileage records for each driver must be maintained. As this would be required for the payment of expenses anyway, most organisations do not find this a problem. As business mileage will vary each month, the AMAPs and top-up payments will also need to vary, this does add a level of administrative complexity to a SECOS. It’s for this reason, amongst others, that most employers that operate ECO schemes outsource its operations to specialist service providers.
The diagram below shows a typical ECOS setup with the flows of information, funds and services between the parties involved:
VAT and Corporation Tax Relief Position
As the title to the car belongs to the employee, the employer is unable to recover any VAT on its purchase price. Also, the business can only claim tax relief in relation to the payment of AMAPs or any taxable cash payments.
Compliance with HMRC requirements
Any ECO scheme should be cleared with HMRC to ensure that it meets their requirements and will not be classed as a company car scheme. ECO providers, such as Maxxia, do this on a regular basis and will be able to provide all of the information required by HMRC and answer any queries that arise.
WILL AN ECO SCHEME SUIT MY BUSINESS?
ECO schemes can be suitable for many types of organisation and fleet, depending on their employee benefit objectives and their transport needs.
They can be particularly well suited to organisations that wish to offer the benefit of a company car to employees who might normally not be entitled to one through their grade or job type. This would be through the implementation of an AECOS, that is not dependent upon business mileage.
Additionally and from an employer’s perspective, a structured ECO scheme can offer cost savings where there are a large number of drivers covering high business mileages. This means that a larger proportion of the monthly cost can be covered by AMAPs.
From an employee point of view, while ECO schemes can provide a valuable benefit to anyone, they can be particularly beneficial where other funding methods, such as salary sacrifice, have negative tax and National Insurance implications. This is most often found when employees paying higher rate tax choose cars with high CO2 emissions.
As each organisation (and each individual driver) will find themselves in a slightly different position, it may be that ECO alone is not the best solution for your business. Maxxia is able to provide schemes which blend a number of funding methods such as ECO, Salary Sacrifice, affinity programmes and traditional company cars to precisely match organisational requirements.
Find out how an Employee Car Ownership Scheme
could help your organisation
WHAT’S INVOLVED IN THE IMPLEMENTATION AND RUNNING OF AN ECO SCHEME?
As ECO schemes are an agreement between the individual employee and the funder, the implementation can be quite straightforward from the employer’s perspective, especially if the employer is offering an AECOS. By choosing the right partner, organisations can effectively outsource much of the set up and management of the scheme, while still providing input on policy or other specialist requirements.
As mentioned above, the main piece of additional administration required for a SECOS is the recording of drivers’ monthly business mileage and the calculation of payments either by AMAP, cash allowance or both. Specialist providers, like Maxxia, are able to undertake this task on behalf of their clients, providing instructions to the organisation’s payroll team on the exact type(s) and amount of payment to make to each driver.
One of the key factors in the success of Employee Car Ownership schemes is communication to employees. As with any change to remuneration, there is likely to be some apprehension among employees about whether they will be better or worse off under the new system. By clearly outlining the advantages in terms of taxation, vehicle choice and the ability to drive a better car at a lower price, these concerns can quickly be overcome.
Providers, such as Maxxia, who have significant experience in ECOS implementations, are able to provide communication advice and support. This comes not only at the point of implementation but also on an ongoing basis, to ensure that the scheme is clearly understood and that the value of the employee benefit is fully appreciated.
When the scheme is up and running, all day to day administration and driver services can be managed by the fleet partner. At Maxxia we provide the driver with a choice of online and telephone services depending on their personal preference. These services cover:
Handling enquiries about the scheme and explaining the options available.
Choosing the vehicle that is right for them, including the arrangement of test drives.
Conducting credit and affordability checks as required by our FCA regulation.
Ordering the vehicle, including verifying the required specification and options, and providing guidance on delivery times.
Delivery of the vehicle to a convenient location and ensuring that a full hand-over and familiarisation take place.
Providing reminders for scheduled servicing and MOTs and making bookings for any maintenance or repairs required.
Dealing with all ‘in life’ queries and providing any assistance that the driver may require.
Advising drivers of end of contract options and ensuring a smooth transition to their next vehicle.
HOW MUCH WILL AN ECO SCHEME COST THE ORGANISATION?
With Maxxia there are no set up costs for Employee Car Ownership schemes for either the organisation or the employee.
As one of the key measures of success of the scheme is likely to be its cost effectiveness versus other forms of car provision, we ensure that it is structured to be as cost-efficient as possible, maximising available tax and National Insurance savings and delivering vehicles at the best possible price.
Comparing ECOS with other types of funding
|ECOS||Salary Sacrifice||Company Car||Personal Contract Hire|
|Corporate discounts available||Yes||Yes||Yes||No|
|Credit check required||Yes||No||No||Yes|
|BiK tax payable||No||Yes||Yes||No|
|Driver owns the vehicle||Yes||No||No||No|
|Can be extended to all employees||Yes||Yes||No||NA|
|Early termination cover included||Option||Option||Yes||Option|
|Service & maintenance included||Yes||Option||Yes||Option|
|Breakdown cover included||Yes||Option||Yes||Option|