HMRC gives update on new law to end employee car ownership schemes

Six months on from the Treasury promising to end what it labelled “contrived” employee car ownership schemes (ECOS), the industry is still waiting for details on the new rules.

The Chancellor made the pledge in the Autumn Budget, with any new rules due to take effect from April, 2026.

The Treasury estimates that it will be worth an additional £275 million in tax take in its first year (2026/27), £220m in 2027/28, £195m in 2028/29 and £175m in 2029/30.

Alison Ashley, partner and head of motor retail at RSM UK, said: “There are key questions which remain unanswered six months on from the Government’s ECOS announcement, with under a year until the new legislation coming into place.

“The wording of the legislation leaves the door ajar for what might be termed ‘compliant’ arrangements and seems to signal the end of all ECOS arrangements.

“The anticipated financial benefits arising from the changes would seem to suggest there is no room for distinction, but HMRC and the government urgently need to provide clarity while consulting with the automotive industry on the drafting of the proposed legislation.

“The estimated increased tax take is substantial, totalling £865m over the first four years. These figures seem to be predicated on employees remaining in the cars they typically have now under ECOS when these are taxed as company cars.

“Given the taxable benefit values, this seems highly unlikely.” 

While employee car ownership schemes are not as widely used as they were in the past, there are still a number of employers who operate such schemes for their employees. 

They are, for example, widely used by car manufacturers and dealers for their own employees, who can obtain the vehicle at a substantially discounted price.

Ashley continued: “Manufacturers and retailers agree that these proposals would severely impact the market for nearly new vehicles, which relies on 3–12-month-old cars returned under ECOS arrangements for resale.

“The issue extends beyond perceived inequity between sector employees and others, reaching the broader public consciousness as consumers face a significantly diminished market for their next car.”

An ECOS car looks and feels like a company car with one significant difference – the employee, not the employer, owns the car. 

As ownership rests with the employee, there can be no company car benefit no matter how much support or discount the employer provides.

The employee purchases the car under a credit sale agreement and meets the monthly finance and running costs using a mixture of the income tax savings from no longer having a company car and the maximum tax-free mileage reimbursement for business journeys under the Government’s Approved Mileage Allowance Payments (AMAPs) scheme.

Currently, this is 45p per mile for the first 10,000 miles and 25p per mile thereafter for using a privately owned car on corporate business, all of which are deemed to be tax free. Some companies also may provide an employee top-up via the payroll.

With an ECOS, there is no income tax or national insurance contributions (NICs) to pay on the AMAP payments received. Any employer top-up, however, is paid via the payroll and is subject to income tax and employee’s NIC in full.

Employers also have to pay Class 1 NIC on the employee top-up, while it is possible to recover VAT on the fuel element of the full business mileage rates, provided receipts are kept. 

The Government said in the Autumn Budget’s red book: “This arrangement means those benefiting don’t pay company car tax which other employees pay, and so this measure will seek to level the playing field.” 

HMRC told Fleet News the new legislation was still on track. An HMRC spokesperson explained: “Draft legislation and guidance for consultation will be published in 2025, and specific timings will be confirmed in due course.”

Ashley says that sector representative bodies have been making a “strong case” to the Government that it needs to consider the wider ramifications.

“We understand that the Government has recently stated that the target of its proposals are arrangements whose main purpose is tax avoidance, which may be seen as a positive,” she added.

“However, given the broad-brush description in the announcement of ‘contrived’ ECOS, one is left wondering where the line is drawn.

“Will Government view automotive ECOS as more contrived than others, given the relatively short ownership period and consequential limited financial risk to employees? Or will it take on board the wider benefits to employees and consumers as a whole, and look beyond the perceived employment taxes gap at how the VAT take might be impacted by change?”

She concluded: “As industry awaits the draft legislation, employers would do well to review their current ECOS arrangements, particularly if HMRC and government does distinguish between those considered acceptable and those to be targeted via legislation.”