Employee Car Ownership (ECO) schemes offer businesses an affordable way to provide their employees with cars. Employers can save money, and employees get brand new, fully serviced cars.
From the outside, they look and feel very much like standard company cars. But, behind the scenes, there are some critical differences in how the schemes work.
Find out how ECO schemes differ from traditional company car structures and the ways they could work for your organisation.
What is an Employee Car Ownership scheme?
Employee car ownership schemes are a set of arrangements that enable employers to provide their employees with new cars. Cars offered through an ECO scheme usually come from a specified, often single source, or within a specified financing framework.
An ECO scheme is usually more structured and organised than employers simply offering their workers company cars. Employers usually design and administer their own ECO schemes but in some cases, they’re set up by specialist third parties.
An ECO Scheme gives employees the same benefits as a company car, such as:
- A brand new car
- Regular opportunities to change your car
- Full servicing and insurance packages
Unlike company car packages, employees don’t have to pay Benefit in Kind (BiK) tax. That’s because the employee – not the employer – is the registered car owner within an ECO scheme.
How does an ECO scheme work?
ECO schemes have to be administered and organised rigorously. As a result, it’s very common for companies to use a specialist third party to get them up and running.
Employee Car Ownership schemes work as follows:
Step one: The Credit Sale Agreement
Firstly, the employer ‘sells’ a car to an employee under a Credit Sale Agreement (CSA). The Agreement specifies and outlines:
- Contract terms
- Maintenance package
The Agreement should allow employees to make payments under the terms of their ECO Scheme for their contract duration.
As part of a structured scheme, employees get access to corporate vehicle discounts and maintenance costs. The employer also covers their insurance.
Participating employees then receive a monthly ‘loan’ to cover CSA payments, net of their company car tax saving. They can then repay the loan using tax-free mileage payments for business travel.
Employees also receive an annual taxable allowance that enables them to repay any balance on the loan.
Step two: The end of the Agreement
Once the CSA expires, the employee can buy the car outright by settling the rest of the finance. Alternatively, they can choose to ‘sell’ the vehicle back to the company.
Benefit in Kind (BiK) Tax
Because the cars used in an ECO Scheme are owned by the employee from the start of the CSA Agreement, they’re not subject to BiK Tax.
This sets them apart from other forms of funding, such as Contract Hire or Contract Purchase. The use of a CSA ensures a transfer of ownership, preventing BiK from being applied.
Approved Mileage Allowance Payments (AMAPs)
ECO schemes use Approved Mileage Allowance Payments (AMAPs) to help fund the car’s cost for business use. Employees receive their tax-free AMAP monthly to help cover the costs of:
- Road fund licence
- Value depreciation
Along with the AMAPs, employees receive extra payments when their business mileage isn’t enough for the AMAPs (minus the actual fuel cost) to cover the vehicle’s worth. This means the amount of allowance received can vary from one month to the next.
ECO vs Salary Sacrifice
There are several key differences that separate ECO and car salary sacrifice schemes. These include:
- With ECO schemes, the employee owns the vehicle. With salary sacrifice, the company or employer maintains ownership.
- BiK Tax. Because of the difference in ownership, ECO schemes are not subject to BiK tax, unlike cars used through salary sacrifice.
- ECO schemes use Credit Sale Agreement to transfer ownership from an employer to an employee. Salary Sacrifice does not.
Benefits of ECO schemes
ECO schemes introduce different benefits for employers and employees, which makes them a popular choice for both parties.
Benefits for employers
- Fewer risks than other schemes. Employers are more protected from the impact of changing circumstances.
- Greater control. Employers choose the type of vehicles available through the scheme.
- Manage duty of care. New and regularly serviced vehicles for employees means employers can improve the way they manage their duty of care responsibilities and the safety performance of their fleet.
- A greener business. By providing new, more efficient vehicles, organisations enhance their environmental credentials.
- Save money. There are no BiK Tax implications. Because employers can offer more efficient cars, fuel savings can also be made.
Benefits for employees
- Reduced admin. Servicing, maintenance and breakdown cover can all be handled and expensed by the company.
- No down payments. Unlike with some car schemes, employees won’t need to pay a deposit or initial payment.
- More choice. Available vehicles depend on the policy used by the employer and may also include the option to trade up or down.
- Reduced costs. BiK Tax doesn’t apply to cars involved in ECO schemes.
- Flexibility at the end of the contract. Employees can choose to ‘sell’ the car back to the company and get a brand new replacement.
Considerations before using an ECO scheme
While ECO schemes have their benefits, they won’t suit every business. There are some factors you should consider to help decide whether an ECO scheme is right for your organisation over other vehicle funding methods.
To make the most of the savings provided by ECO schemes, employers must optimise the payment of AMAPs. That means maintaining detailed business mileage records for each driver. As this is needed for the payment of expenses anyway, it isn’t an extra job for most companies.
As business mileage will vary each month, AMAPs and any extra payments may also change. This can add more admin work for your business.
VAT and Corporation Tax relief position
As the car belongs to the employee and not the employer, there’s no VAT recovery on the car’s price or maintenance. However, this is usually balanced out with the BiK savings.
Compliance with HMRC requirements
All ECO schemes need to meet the strict requirements set out by HMRC to ensure that they’re not classed as a company car scheme.
Because many company cars are now more fuel efficient with lower emissions, the amount saved from removing BiK Tax is often lower. This can lead to greater top-up payments that significantly reduce savings.
Many ECO schemes have been running for several years now and may no longer deliver the original level of savings. This can be the case for businesses that now have lower business mileages.
Not everyone qualifies
To qualify for an ECO scheme, employees may be subject to credit checks.
Find out more about employee rewards and fleet management with LeasePlan.