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ECOS Car Scheme

Why you probably shouldn't be using an Employee Car Ownership (ECOS Car) Scheme!

Employee Car Ownership (ECO) schemes can offer the opportunity for companies to reduce the cost of providing cars to employees.

Although cars are not technically ‘Company Cars’, schemes are normally structured to have exactly the same look and feel as a Company Car but they can be complex to administer and are not suitable for all businesses so a lot of care must be taken when setting schemes up.

Some questions we are regularly asked about ECOS schemes are :

  • What is special about an ECO scheme?               
  • When is an ECO scheme best to choose?             
  • Are ECO schemes more complex to manage/administer?
  • Could we not use Approved Mileage Allowance (AMAP) Payments instead?
  • If Benefit in Kind Tax rates change how do they impact ECOS Car Schemes

How do ECOS Schemes work? Is this like Business Car leasing?

ECO schemes have been under the significant scrutiny of HMRC over recent years, and as a result new guidelines have been introduced which significantly alter the way in which ECO schemes have to be administered.

The administrative impact of these changes should not be underestimated. Whilst it is generally agreed that the available savings could be significant, generally held views are that due to the complex nature of product delivery and management a large fleet would be needed in order to make the introduction of an ECO scheme attractive.

ECO schemes work as follows:

  1. The employee buys his or her own car, via a Credit Sale Agreement (CSA).
  2. Credit Sale agreements are guaranteed by the employer, ensuring that corporate lending rates are secured As part of a structured scheme, your employees are given access to corporate vehicle discounts and maintenance costs.
  3. Your Employee receives insurance from the employer.
  4. Employee receives a monthly ‘loan’ to assist in meeting the CSA costs, net of their Company Car tax saving
  5. Employee repays the loan using tax free mileage payments for business travel.
  6. On an annual basis, the employee is paid an additional taxable allowance which enables them to repay any balance on the loan account.

Schemes can be improved in efficiency with the addition of Interest Free Loans which further reduce the overall tax cost.

Due to the fact that the efficiency of ECOS Car schemes are predicated on tax-free mileage payments for business travel, ECO schemes are only attractive to employee populations with significant business travel.

ECO schemes can capture some cost benefits through their intricate architecture, such that the overall tax cost is less than that for a Company Car. The opportunity to effect these cost savings are evidently reduced in the case of tax efficient (low CO2 emission cars), where the tax cost is already well controlled.

ECOS Scheme Features - Not quite Personal car leasing


The cost of financing the vehicle is spread over the contract period, cashflow is improved as no large capital outlay (as with outright purchase ) is required.

Cost Of Finance
Leasing vehicles through a corporate sponsored programme, it would be expected that finance costs would be less than those charged to individuals accessing finance through conventional retail sources.

In line with cash outflows these will be neutral but dependent on the structure of the specific scheme there may be issues in the event of early termination.

Setting a fixed duration and mileage at the start can be difficult. An Eco scheme can enable changes through the term of the contract, it may be possible to amend these parameters part way through. Amending the contractual parameters enables you to change the mileage and duration as required. However these amendments would require the credit sale agreement between the lessor and the employee to be revised and it should not be underestimated the potential challenges in getting any revisions to a contract formally executed in a compliant and timely manner.

VAT Recovery
VAT Recovery - NO Input VAT will be recoverable on the purchase price and no input VAT is chargeable on the finance rental as these charges are paid by the employee.

Residual Value Risk
Residual Value Risk - Risk and reward associated with the value of the vehicle at the end of the period of ownership is retained by the employee but financed by the employer, you are not protected from any adverse movements in the used vehicle market. However in certain circumstances a ECO scheme agreement can be structured in a way that all vehicles are sold back to the leasing company at a pre determined balloon value (Residual Value) thus transferring the residual value risk back to the leasing company.

Tax Deductible Expense
Tax deductible expense – Costs are all passed through payroll and hence fully deductible.

Vehicle Management and Administration
It is typical that the management and administration (in full or part) associated with this acquisition method is provided by a specialist Fleet management company.

Early Termination Costs
Early Termination Costs - varying formats for calculating charges in the event that a vehicle is returned prior to the agreed contract end date exist. In some circumstances these cost may reflect the actual market adjustment required to cover costs associated with the early return of the vehicle and may include additional costs levied by the lessor. It should also be noted that tax and national insurance would be payable by the employer if these costs had not been reimbursed by the employee.

Excess Mileage and Damage Charges
Excess Mileage and Damage charges - when a fixed monthly rental is calculated the services charged for and depreciation recovered in the finance rental is based on the contracted mileage and assumed return condition at the end of the contract, if the return mileage is greater than the contracted mileage or the return condition is below the industry standard for a vehicle of similar age and mileage than additional charges will be levied to compensate the financing company.These charges should reflect market conditions and therefore would be in line with other acquisition methods, however depending on the finance company may include some form of incremental administrational charge or penalty.

It should also be noted that tax and national insurance would be payable by the employer if these costs had not been reimbursed by the employee.

Option To Own The Vehicle
As this product is structured as a conditional sale agreement, on payment of a final balloon invoice the employee could then retain the vehicle as set out at the onset of the contract.

Also an option may exist for the vehicle to be passed back to the lessor with the final balloon obligation being offset against the pre agreed repurchase value.

Sounds quite complex!

So why not just use Personal Car Leasing and AMAP Payments?

We compared the Company Car or Cash Allowance considerations in our blog earlier here! so need less to say we think this could be a simpler solution.

  • Many companies now find using AMAP payments to pay employees to use their own vehicles is the simplest way forward.
  • This helps avoid Benefit in Kind tax increases seen with Business Car leasing and Company Car drivers
  • This can be done with or without cash allowances and is much simpler to implement and administer, many businesses will be using this method already
  • There is no credit sale agreement involved, the employee leases their own vehicle and takes it with them even when they change roles
  • Cash allowances and mileage rates need to be set carefully to ensure they are fair for the employee and don't encourage excessive business mileage
  • This leverages tax free mileage payments (AMAP) and can work for any level of business mileage and any size of business
  • On-going administration and monitoring requirements are much lower than an ECOS scheme

Summing Up! 

Given the relative complexity involved and the fact that ECOS schemes work more effectively when there is relatively high business mileage and a larger fleet then for the vast majority of fleets it an ECOS schem won't be an option.

A potential alternative is using Cash Allowances and AMAP payments which need to be carefully implemented but are a simpler more cost effective option for many Fleets, if you would like to discuss any of these options or require more information call us on 0330 056 3331 and LetsTalk!


ECOS Car Scheme

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