Employee car ownership schemes

An employee car ownership scheme (ECOS) is a set of arrangements whereby employees acquire cars from a specified or single source within a specified financing framework. A key feature of an ECOS (which may also be known as an employee car purchase scheme or by another similar name) is that ownership of the car is transferred to the employee from the outset. As there is a transfer of ownership, cars made available to employees under an ECOS fall outside the benefit in kind charge for company cars. Instead, the car is treated for tax purposes as the employee’s own vehicle.

However, this is set to change. The government have published legislation in draft which will widen the scope of the benefit in kind charge on company cars, bringing cars provided under an ECOS into charge where the arrangements under an ECOS into charge where the arrangements under which the car is made available are qualifying arrangements. The new rules are due to come into effect from 6 October 2026 and it is estimated that they will affect around 76,000 employees.

Tax charge on company cars

A tax charge arises under the benefit in kind legislation where a company car is available for an employee’s private use. The charge applies where a car is made available to an employee or a member of their family or household (without a transfer of ownership) by reason of the employee’s employment and is available for the private use of the employee or the member of their family or household.

Consequently, for the tax charge to arise, all three of the following conditions must be met:

• There is no transfer of ownership.
• The car is provided by reason of the employee’s employment and;
• The car is available for the private use of the employee or the member of the employee’s family or household to whom it is provided.

Thus, where a car is made available under an ECOS, the company car tax rules do not apply as the first condition (no transfer of ownership) is not met.

Characteristics of an ECOS

Employee car ownership schemes are designed to provide the employee with similar benefits to those derived from having a company car, such as a new car on a regular basis, provision of servicing and insurance etc, but in such a way that a benefit in kind charges does not arise under the company car tax rules. An ECOS involves more than simply providing an employee with cash instead of a company car, which the employee can use to buy or lease their own car.

Under the ECOS arrangements, the employee is able to purchase the car at a significant discount from the list price. Ownership of the car is normally transferred to the employee from day one. The purchase is facilitated by an unsecured loan which is structured through a credit sale agreement. The scheme allows the employee to sell the car back to the dealer for a guaranteed amount after a short period, meaning the employee does not suffer a depreciation hit. The dealer usually sells the cars on to customers as nearly new cars. The scheme may be operated by the employee’s employer, by another company in the same group or by a third party.

To determine whether a set of arrangements counts as an ECOS, HMRC (at EIM 31505) advise their officers to check the scheme documentation. For the provision of the car to fall outside the company car tax rules, the ownership of the car must be transferred to the employee at the outset.

The documentation may include all or some of the following: 

•  A document or brochure outlining the scheme.
• The scheme rules.
• Agreements between the employee and the employer.
• Agreements between the employee and the finance company.
• Agreements between the employee and the car provider.
• Correspondence and agreements between the employer and any third parties involved, such as finance providers and car providers and;
• Instructions to staff as to the operation of the scheme.

An ECOS only comes into existence once an employee has been provided with a car. HMRC officers are also instructed to check that the way in which the scheme operates in practice matches the documentation.

Current tax and NIC treatment of ECOS cars

There is no legislation dealing specifically with cars made available to employees under an ECOS. As previously noted, the transfer of ownership to the employee takes the car outside the ambit of the company car tax rules. Instead, the car is treated as the employee’s own vehicle for tax charges.

There are various tax charges which can potentially arise in relation to an employee’s own vehicle, both in relation to the provision of such a car to the employee and the use of that car by the employee. Some of the potential tax and National Insurance charges are discussed below.

Mileage payments

If an employee uses their own car for business purposes (including one made available under an ECOS), their employer can pay them a mileage allowance tax-free up to the approved amount under the approved mileage allowance payments (AMAP) scheme. The approved amount is the amount found by multiplying the business mileage in the tax year by the AMAP rate. For cars, the rate is 40p per mile for the first 10,000 business miles in the tax year and 25p per mile for any further business miles. The approved amount is the maximum amount that can be paid tax free, even if the actual cost of using the car for business exceeds the approved amount. Any amounts paid in excess of the approved amount are taxable.

For national Insurance purposes, there is no National Insurance to pay as long as the amount paid does not exceed the relevant motoring expenditure (RME). For National Insurance purposes, a rate of 40 per mile is used for all business mileage in the year.

Where the employer makes a payment for private mileage, the amount paid is taxable and liable to Class 1 National Insurance.

Transfer of car to employee

If the amount that the employee pays for the car is less than the market value of the car or, where higher, the cost to the employer of providing the car, the employee is taxed on the difference. As cars made available under an ECOS are often at a good discount, a tax charge may arise as a result.

Insurance, servicing and repairs 

Where a tax charge arises under the company car tax rules, that charge covers all costs arising from the provision of the car (such as the cost of servicing and repairs, insurance, vehicle excise duty, etc.), other than the cost of a chauffeur. Where the car is the employee’s own car (including one made available under an ECOS), a separate tax charge will arise if the employer meets ancillary costs, such as insurance, servicing and repairs.

The taxable amount is the cost to the employer less any amount made good by the employee. If the employee initially pays these costs but is reimbursed by the employer, the reimbursement must be paid through the payroll and is liable to PAYE and Class 1 National Insurance.

What’s changing?

HMRC view ECOS’s as arrangements which provide employees with similar benefit to those derived from having a company car but without the associated tax charge. This is something that they wish to clamp down on. To this end, legislation contained in the Finance Bill 2025-26 (and published in draft for comment) will extend the company car tax rules from 6 October 2026 so that they apply where a car is made available to an employee with a transfer of ownership under arrangements that are qualifying arrangements. Vans made available in this way are bought within the scope of the benefit in kind rules for vans available for private use.

Arrangements are qualifying arrangements if any of the following apply:

• The arrangements include restrictions on the private use of the car by the employee or the member of their family or household.
• They provide for a person other than the employee or the member of their family or household to be the registered keeper of the car.
• They provide for the employee or member of the employee’s family or household, after a certain period of time or in certain circumstances to transfer the property in the car to another person for an amount set out or determined in accordance with the arrangements.
• The arrangements are of a description specified in regulations made by the Treasury.

The car is treated as being made available to the employee or the member of their family or household until the arrangements cease to have effect.

Implications for clients

Employee clients who on or after 6 October 2026 have a car made available to them under arrangements which fall within the definition of qualifying arrangements will fall within the company car tax rules. They will be subject to a benefit in kind tax charge on their car, the taxable amount of which will depend predominantly on the car’s list price and the level of it CO2 emissions. They may wish to review whether an ECOS arrangement continues to work for them in light of the new charges. Ahead of the changes, they may wish to consider the potential tax charge on their car and consider opting for cheaper lower emission models to keep the tax charge down.

Employer clients offering an ECOS may wish to review whether these continue to be beneficial in light of the forthcoming changes and assess whether moving to a more traditional company car scheme would be beneficial.