HM Revenue & Customs are to review Employee Car Ownership Schemes (ECO Schemes)

At the time of the budget the Government announced that it was to carry out a review of ECO Schemes. The nature of this review was not outlined but in an evaluation report on company cars there was mention of the reduction in the number of company cars by 400,000 since the change in the taxation rules in 2002. The Revenue issued a consultative document in regard to ECO Schemes on 8 May 2006 and a copy of this document can be found on the Revenue website at www.hmrc.gov.uk.

The consultative documents state that the purpose of their review is to build the evidence based on:

1. How ECO schemes work (including financial arrangements);
2. What factors have contributed to the expansion of these schemes;
3. What the impact of ECO schemes has been on carbon dioxide (CO2) emissions and local air quality compared with company cars;
4. Whether ECO schemes offer an advantage to employees or employers that should be taxed (and subjected to National Insurance) as a benefit in kind and if so how;
5. The wider impact that such a charge might have, for example on ECO schemes themselves or on the used car market etc.

The Revenue has set up three meetings to be held in June 2006 and interested parties have been invited to attend.

It is interesting to see that the Revenue considers there is a growing interest in ECO schemes and this may be a major factor in the reduction of company cars since 2002. Whilst there remains an interest in ECO schemes I suggest that they do not account for the reduction in the number of company cars, reported as 400,000. We have seen a move by many corporates to simply cash out of cars and whilst the recent ‘duty of care’ issues may have impacted on this there is still in my experience a considerable interest to move away from cars. I do not know how the Revenue has got to its figure of 150,000 for ECO vehicles and it is difficult to determine how accurate this is.

We have seen over recent months a significant number of challenges on ECO schemes. These have largely been based on the Revenue wanting to be satisfied that the income tax and National Insurance arising is correctly calculated. This largely arises due to the changes in the tax legislation relating to mileage payments which occurred in 2002. There have also been moves to prohibit the use of PAYE Settlement Agreements to account for any income tax and National Insurance. Whilst the Revenue clearly found there were some difficulties in this area this does not appear to be a significant problem. However, the stopping of the use of the PAYE Settlement Agreement is causing significant problems for a number of employers. The difficulty is that whilst it does not impact on the income tax and National Insurance which is payable it means that employers now have to deal with any income tax or National Insurance liability either via the payroll or forms P11d. This leads to significant administration. It seems this request is out of line with the Revenue’s historical policy and may well be considered a breach under the Human Rights Act.

In the majority of ECO schemes the only item which escapes taxation is the corporate discount that is offered by the car manufacturer or dealer in regard to the vehicle. There may in addition be discounts provided in regard to maintenance or insurance for the vehicle. It would be surprising if the Revenue took the view that this discount should be taxed. If this approach was to be followed then a similar approach would need to be applied to other discount arrangements made available to employees. This would have a significant impact on many flexible benefit schemes and commercial arrangements in place with many employers.

There have been concerns expressed previously that the growing interest in ECO schemes arises due to the fact that the approved mileage allowance rates are generous. I believe there is significant evidence that this is not the case and in reality the mileage rates are only generous for those who decide to drive low CO2 emission vehicles. I believe there is also evidence that those in ECO schemes do not tend to drive vehicles which are significantly CO2 emission unfriendly. Clearly in setting up ECO schemes it is important to set the policy such that it encourages employees in to CO2 emission friendly vehicles.

It will be interesting to see what develops from this consultation process. It is unlikely those in ECO schemes will be keen to find themselves back in to conventional car schemes. If there is to be any change in the taxation treatment then it is likely to encourage more employees in to a cash option which does not sit well with the ‘duty of care’ issues facing employers.

It is also interesting to learn what the Revenue are hoping to gain from their meetings. I cannot believe those employers and lease providers attending will be prepared to open up in front of their competitors with details of their schemes.

I do suggest it is important if you have an interest in ECO schemes that you ensure you are in attendance at one of the meetings and actively involved in consultation process. It is also important if you or your employees are members of professional bodies which are likely to be involved in making representations that you ensure your views are expressed.

Alastair Kendrick
Wilder Coe

Alastair Kendrick is a tax partner in Wilder Coe a London firm of Chartered Accountants. Alastair is a leading specialist in company car taxation and works with a significant number of employers and lease providers who offer ECO schemes.