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Employee Car Ownership Schemes live on

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29 April 2014

How do ECOS vary?

In the case of big businesses with plenty of cash, they can use the £10,000 interest-free loan allowance (and by the way this doubled from £5000 at the beginning of this tax year) and use this to help fund a car, topped up by a 3rd party finance arrangement. The savings get better as the cost of finance is reduced.

Other, perhaps smaller, employers might prefer an ECOS that makes the most of NIC savings and tax and NIC-free AMAPs (Approved Mileage Allowance Payments). Either way, the savings can be significant (see the example on the next page).

And either way it’s crucial to understand the basic rules of compliance for ECOS arrangements and to be aware of the pitfalls that you will need to avoid.

 

Understanding the rules of compliance for ECOS

  1. Rule 1 as that whatever arrangement is entered into by the employer for the employee – that’s to say any formal car scheme that is not a company car scheme (and therefore liable to Company Car Tax) – the employee must have outright ownership of the car.  It can’t be financed by PCP, Hire Purchase, or Personal Lease as under these arrangements ownership does not pass to the employee. This condition must be observed from the outset – from the day the car is acquired.  However the car can be funded by a Personal Loan or a Credit Sale Agreement, the option most commonly used.
  2. Rule 2 is that from the outset, employees joining an ECOS must be credit checked (as much a FCA requirement as anything). Employers may not underwrite the loan and/or assume any liability for the car itself or any associated funding.  If an employee leaves, any settling of remaining finance obligations must form part of the termination package so that any tax or NICs that are due will be paid accordingly.
  3. Keeping an accurate account of business mileage is vital. Every journey must be properly recorded with a clear indication of mileage at the start and finish of a trip as well as its purpose.  Easy to do, but so easy to forget. Keep a pad in the car, or get one of the apps that are proliferating.
  4. AMAPs must be reconciled within each period for NICs and cannot be left to the year end.  It’s OK to miss a deadline and roll months together as long as they are calculated and paid according the right period.
  5. AMAPs that are not worked out monthly and paid within the tax year risk being either lost or taxed and made subject to NICs.  This applies to  arrangements where business mileage is estimated.  Suppose an employee has driven 10,000 business miles during a tax year but has been paid 15,000 in AMAPs as part of a monthly allowance. In this case, the employer will be liable for tax and NICs on the value of the payments.  On the other hand, where the employee drove 15,000 business miles but was only paid for 10,000, the excess tax and NICs paid by the employer can’t be reclaimed and the AMAPs will be lost to the business. The employee could however claim Mileage Allowance Relief on the 5000 business miles).
  6. If an employee leaves the business, ECOS arrangements can get costly. It’s possible to insure against this but the policies are both expensive and hard to claim against. Better then to factor in at the outset of an ECOS a percentage of loss due to early termination and restrict terminations to redundancy.  This also keeps key employees with a roving eye onside.
  7. Since the savings you make through an ECOS rely on AMAPs  if employees average less than 10,000 business miles a year it probably won’t work for your business.  Having said that, ECOS arrangements don’t have to be applied over the entire fleet and they can be very useful in producing savings in Car Benefit if provided as part of the whole solution.

Don’t be put off by all these rules. There are companies out there who specialise in setting up ECOS and who will ensure your compliance.

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Matt Morton

Matt Morton

Matt Morton is an automotive content writer for Business Car Manager

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