Opinion: ECOS removal risk for car industry and Treasury tax revenues

By motor industry expert Martin Ward

The Government and HMRC are planning to scrap the employee car ownership scheme (ECOS), a tax loophole, which is a great incentive for both car workers and motor industry employers.

It’s a really good and well used scheme that has been in place for many years and has had the full approval of HMRC.

The scheme differs from traditional salary sacrifice schemes in that the car is owned by the employee, not the employer.

Operated mainly by carmakers and their dealers, ECOS enables an employee to buy a new car at a hugely discounted price. Monthly repayment bills are very low, with little or no interest charged.

The employee is required to sell the car back, typically after six months or 6000 miles. It’s then replaced by another because the car is owned by the employee and not considered a company asset.

The employee is not required to pay benefit-in-kind (BIK) tax or national insurance contributions.

It is estimated that between 75,100-100,000 cars are registered via ECOS at any one time, but that number could be up to 200,000 a year.

The Government, however, reckons it costs the economy millions in lost company car tax and in last year’s Autumn Budget, Rachel Reeves quietly announced that it was on her list of tax-grabbing targets.

She believes it’s a contrived car ownership scheme and is planning to scrap it from April next year.

If the plan goes ahead, it will be yet another blow to the motor industry and will particularly affect those manufacturers who have plants in the UK, and many thousands of their staff, who can take advantage of having a new car and replacing it regularly.

When the deal period ends, these cars end up on dealer forecourts as low-mileage, nearly new used cars, and the dealers love this stock.

The Government estimates it loses around £270 million a year in lost taxes. But if the loophole is closed next April, industry chiefs believe it will harm the economy and end up costing the taxman much more than is gained.

They believe that many who currently take advantage of the scheme will simply stop buying new models and buy used ones instead, keeping the cars for many years.

As a result, new car registrations will drop dramatically, with a clear impact on the UK economy.

SMMT chief executive, Mike Hawes, wants the Government to reconsider and believes that if ECOS is scrapped, it would restrict manufacturers’ ability to retain and recruit staff.

Although such schemes are regarded as a nice perk, you have to consider that employees in other industries, companies and even Government ministers and MPs benefit from the perks of the job.

Prime Ministers get new suits and glasses. Chancellors receive VIP tickets to pop concerts. Emergency service workers get discount cards and codes, and supermarket employees get discounts, and so it goes on.

I wonder if they all pay tax on their perks.

HMRC might get back the £270m, but if new car registrations slump as a result, the losses on VAT and additional VED on cars over £40,000 will be enormous and could be up to three times more than the £270m gained.

Dealers will not have the nearly new desired stock they need and consequently wouldn’t pay any VAT on tax on lost sales, while sales staff would be out of pocket because they aren’t selling as many cars.

If the Government goes ahead with these changes next April, it will have enormous unintended consequences and, in my opinion along with that of many others in the industry, will prove to be a disaster.