Employee Car Ownership Schemes (ECOS) have long been a “trademark” of the automotive sector, delivering what can only be described as a high-value, low-cost car benefit to employees. But as the tax landscape evolves, and with it the clear message from HMRC that it plans to end “contrived” car ownership scheme arrangements, many dealerships will want to adopt a “prepare for the worst, hope for the best” approach.
We’ve captured why ECOS remain valuable, what challenges may lie ahead, and how businesses can adapt to ensure they can continue to attract and retain the best people without breaking the bank.
The Unique Appeal of ECOS in Automotive
For decades, automotive businesses have used ECOS to provide employees with cars in a way that benefits both sides:
- Affordable Ownership: Employees can own a car from day one, purchasing it at a significant discount to its list price using trade-level discounts. This is facilitated through an unsecured loan, structured through a credit sale agreement.
- Minimal Depreciation Impact: Cars are owned for a short period, typically 6-9 months. At the end of this period, dealerships buy back the vehicles at market value, selling them to customers as nearly new. This ensures employees avoid the financial burden of depreciation and maintenance costs.
- Low Cost, High Value: Employees enjoy the prestige of driving high-value cars without the high tax cost associated with driving that vehicle as a company car. Meanwhile, dealerships achieve sales targets and enhance stock rotation.
- Flexibility: Agreements are often designed to provide for variable contract lengths and mileage limits offering convenience to employees and the dealerships.
This “ownership” model has proven to be a win-win, allowing manufacturers and dealerships to meet sales targets while delivering significant cost savings to employees. HMRC has never really “liked” ECOS arrangements given that the main purpose is to avoid cars being taxed as company cars, so perhaps not the greatest surprise that they are looking to legislate to stop “contrived” arrangements from April 2026.
Which ECOS Arrangements Are at Risk?
No one outside of HMRC has any clear understanding of the types of arrangements they believe to be “contrived” and whether HMRC are targeting all Car Schemes or just those in certain sectors.
Compared to ECOS arrangements in other sectors, those in the automotive industry may possibly appear more “contrived” from HMRC’s perspective and therefore may be more at risk.
Here’s how they differ:
- Short Ownership Periods: Automotive ECOS typically involve ownership periods designed to coincide with the point where the car’s cost equals its market value, avoiding depreciation costs for employees. In contrast, Schemes operating in other sectors will typically have longer ownership periods (3-4 years), where cars suffer depreciation and maintenance costs which are met by the employees.
- Limited Employee Financial Risk: The shortened ownership period ensures that additional costs, such as maintenance or tyre replacement, are kept to a minimum. Any damage to the vehicle can be fixed in workshops often at no cost to the employee, and excess mileage charges, which are typical in more commercial arrangements, are often overlooked.
- Buyback Practices: Schemes in the sector rely heavily on rapid buyback and resale, making them feel less like traditional car ownership and more like a structured, transactional arrangement.
Whilst these differences give clear advantages to those in the automotive sector in comparison to more normal commercial arrangements, they may place businesses operating ECOS under increased HMRC scrutiny. While there’s currently no definitive statement that automotive schemes are under threat, businesses must be prepared for potential challenges.
Preparing for the Worst, Hoping for the Best
It’s critical for businesses to consider what might happen if HMRC decides to clamp down on ECOS arrangements, especially in the automotive sector. Here are some practical steps to safeguard against disruption:
- Review Compliance Thoroughly: Ensure your schemes are structured in a way that aligns with HMRC’s published guidance and doesn’t rely on “grey areas.” Consider conducting regular audits to ensure practices remain above board.
- Develop Alternative Benefits: If ECOS arrangements were curtailed, what other low-cost, high-value benefits could you offer? Consider enhanced car allowances, salary sacrifice schemes, or additional non-monetary perks that align with employee needs.
- Engage Employees Early: Employees value the affordability and simplicity of ECOS. If changes become necessary, transparent communication will be vital to maintain trust and engagement. It is possible that we may also see grandfathering of existing contracts, which may provide an opportunity to extend ECOS beyond April 2025 in some shape or form if certain schemes are stopped.
- Monitor Industry Trends: Keep a close eye on HMRC’s actions and emerging industry practices. Being proactive can help you stay ahead of any changes.
- Collaborate with Experts: Work with tax advisors and legal professionals to ensure your schemes remain robust, defensible, and adaptive to potential scrutiny.
The Path Forward
Employee Car Ownership Schemes have delivered exceptional value for years, particularly in the automotive sector. While it’s impossible to predict the future with certainty, preparing for potential challenges ensures businesses can more easily adapt without compromising on the benefits they provide.
By embracing a “prepare for the worst, hope for the best” mindset, businesses can continue to innovate and deliver value, no matter what the regulatory landscape holds.
The key is balance: maintaining the appeal of ECOS, to the extent that remains possible, while ensuring compliance and resilience. With the right strategies in place, there’s every reason to remain optimistic about the future of employee benefits in the automotive sector.
Need expert advice on ECOS and how to navigate the challenges ahead? Contact our automotive team at Cooper Parry. We’re here to help you explore compliant, innovative solutions that deliver value for your business and employees.