EMPLOYEE car ownership (ECO) schemes have been the subject of much debate and confusion recently.

The key issue has been HM Revenue & Customs’ approach to such schemes after its review of the system sparked by fears that drivers choose more polluting cars when opting to participate in ECO schemes.

Fleet News asked three experts in ECO schemes to give their assessment of the state of play. Who can benefit from ECOs and what are the pros and cons?

Alison Chapman, partner, Deloitte

MANY blue-chip companies bought into the concept of cash allowances and ECO schemes that left employees cash neutral and provided savings for themselves by axing company cars.

Initially viewed as tax-efficient and cost-effective, the reality has been that for some companies the promised savings have not accrued and the administrative burden has been massive, due to the complexity of some of the myriad schemes on the market.

Additionally, many of the savings have proved to be the result of stopping ‘free’ fuel for private use. These savings could have been made and the company cars retained. Such decisions are now being reviewed and a return to company cars is invariably one of the options being discussed at board level. However, it is very difficult for an employer to come up with a single policy that is workable from an HR perspective, while achieving the optimum cost position.

Technically, ECO schemes continue to work and they remain very good as an alternative to company cars for some employees, but employers must pick and choose who is most suited. One size rarely fits all.

Moving to an ECO scheme, properly managed by a reputable supplier, can give companies the same control as with a company car fleet. The key to the savings is the amount of business mileage driven and the company’s ability to offset the costs by offering drivers the maximum approved mileage allowance payments (AMAP), which are tax and National Insurance free.

Irrespective of who owns the car, all companies are legally responsible for the health and safety of their employees driving on company business. Many companies wrongly believe that allowing employees to drive their own cars on business absolves them of any responsibility.

This is particularly with regard to the monitoring of service, maintenance and repair of vehicles, checking that the correct insurance is in place and if vehicles are ‘fit for purpose’.

While a cash alternative and the payment of a mileage allowance may seem straightforward, if HM Revenue & Customs (HMRC) changes the current level of tax-free payments or mileage parameters, or makes other changes as part of its current review, it could further influence the return to company cars.

Harvey Perkins, director of tax and people services, KPMG

HMRC is currently conducting a strategic review around ECO arrangements, as well as an operational review of those already using such an arrangement.

Existing tax legislation is sufficient to allow HMRC to limit the more aggressive or clearly non-compliant examples of ECO schemes.

While it cannot be ruled out, it will be difficult for HMRC to close the ECO opportunity by changing the existing tax legislation – as ECO exists by using the rules as they apply to cash payments and expenses, which have broad application outside of such planning. Accordingly, there is no simple change to legislation which would rule out the opportunity.

The consultation phase has now ended and HMRC has written a report for ministers. Expect to see some mention of the way forward in the Pre-Budget Report.

HMRC has written to a number of businesses to challenge ECO arrangements that were designed and implemented by other advisors.

Arguably, this is an aggressive approach, primarily focusing around whether NIC liabilities have been settled in the correct pay periods.

Current ECO arrangements often use the PAYE Settlement Agreement (PSA) or some form of loan arrangement, so that NIC is settled at the end of the fiscal year. HMRC does not accept that this is effective as NIC is not accounted for in the correct pay period.

We have examples of clients who have in the past received sign-off to their schemes – for tax purposes – and yet still face the challenge from HMRC arguing that the sign-off did not extend to NIC. We are aware of one company that worked with a different advisor to implement ECO and has recently reached a settlement of over £1.5m with HMRC in these circumstances.

If HMRC concerns can be managed we are left with an arrangement that can be extremely attractive in certain circumstances. ECO is likely to be attractive for fleets with medium to high business mileage – say, an average of more than 6,000 business miles per annum – and/or reasonable to high manufacturer support on vehicles, such that wholelife costs are relatively low.

Any combination of these is likely to mean that significant savings can be achieved using the ECO methodology. Several advisors suggest that typical savings could be £1,000 per car per year. Actual saving levels can vary wildly, depending on a number of factors.

Alastair Kendrick, partner, Wilder Coe

EMPLOYERS with staff who cover high levels of business mileage should consider whether ECO is viable for them.

This may be across the fleet or for a particular population of company car drivers.

The level of business mileage is important because the employer can pay up to 40p per mile tax-free for the first 10,000 business miles in a tax year and 25p per mile thereafter (AMAP payments).

In an ECO scheme, the employer needs to get money to the employee to fund the cost of the vehicle.

This will normally be the amount needed to pay the vehicle’s maintenance and finance repayments, less the amount the employee would have paid in company car tax.

If the employer makes additional contributions above AMAP payments, they need to meet the income tax and National Insurance (NI) arising on that sum. This is why ECO is only normally viable if you are doing high mileage.

Another influencing factor is the level of staff turnover.

In an ECO arrangement, it is very difficult to re-allocate the vehicle and, if this is disposed of on termination, the employer has not only to settle the loss on sale but also the income tax and NI arising on this sum.

There are solutions to this issue, but they are often complex to administer.

To justify the payment of AMAPs throughout the year to employees, employers must keep accurate mileage records. If they can’t prove the payments were justified, there can be significant penalties.

It should be cleared with HMRC that the payment made to the driver will not be considered taxable. This is a major issue and if wrong could be very expensive.