Employee Car Ownership Schemes - New tax and NICs guidance from HMRC

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HMRC has published new detailed guidance on the taxation and NICs issues for cars provided under an Employee Car Ownership Scheme (ECOS). It appears in a new section to the internal Employment Income Manual, most of which is available publicly on HMRC's website. The material is unusual in that it also covers the NICs implications of ECOS, not just the tax issues.

The following notes describe the key points from the new guidance.

Identifying an Employee Car Ownership Scheme

Although it may have a different name, an ECOS is a set of arrangements whereby employees acquire cars (1) from a specified, often single source, and (2) within a specified financing framework. It is something more organised than the employer replacing a company car with a taxable car allowance. That arrangement leaves it up to the employee to obtain a car and employer is not involved in the purchasing or financing arrangements in any way.

In contrast, an ECOS may be designed and administered by the employer, by a company within the same group as the employer, or by a third party that specialises in provision of alternative packages to the company car. The objective of an ECOS is to give employees similar benefits to a company car, e.g. a new car on a regular basis, central organisation of insurance and servicing, in a way that means the car benefit provisions do not apply.

Avoiding the car benefit charge

To avoid the car benefit charge, one or more of the car benefit conditions must not apply. It is only possible to escape two of those conditions while still providing benefits similar to a company car, namely that the car is provided "by reason of the employment" and "without any transfer of the property in it". As the employer is directly involved, the first condition cannot be avoided. The second condition does not apply if ownership of the car in an ECOS is transferred to the employee at the outset. This would be a key test for a tax inspector, in order to determine whether or not the car benefit charge does not apply.

A tax inspector would require to see all of the documentation relating to the scheme. HMRC will only form a definitive view of the tax or NICs consequences of a particular scheme if it is already in operation. If new documents are disclosed later or existing documents are amended because the scheme has changed, any earlier agreements on the status of the scheme cannot be relied on. HMRC's guidance is also clear that, in the context of schemes managed by third parties, approval given to one employer's scheme does not apply to an identical scheme operated by another employer. The other employer has to obtain separate approval.

Tax and NICs consequences

If a car is subject to a car benefit charge, the only possible additional charges are for the provision of fuel and a chauffeur. In contrast, if a car benefit charge is avoided under the rules of an ECOS, every individual transaction must be considered for both tax and NICs, for example

• any payments made in connection with the vehicle - see below
  
  
• the provision of any benefits in kind, such as vehicle excise duty, insurance, repairs and servicing - see below
  
  
• the price at which the vehicle is sold to the employee - under the rules relating to assets transferred to a director or employee
  
  
• the amount at which the employee can resell the car to the employer or provider (commonly referred to as the 'guaranteed future value') - under the rules relating to assets transferred at overvalue.

Payments made in connection with the vehicle

Liabilities for tax and NICs may arise in connection with the following payments that provide the employee with a benefit:

1. Money payments received by the employee in person - there are three kinds:
   
   
   • Payments made in respect of mileage expenses of business travel, such as a flat rate per business mile, fall within the "mileage allowance payments" (MAPs) rules.
     
     
   • Payments made in respect of the use of the vehicle, including private use, e.g. toll and parking charges, are business expenses and subject to normal travel rules.
     
     
   • Payments not connected with business mileage expenses or with use of the vehicle are simply earnings for both tax and NICs.

2. Payments other than to the employee of the employee's personal (pecuniary) liability are reported on form P11D for tax purposes and as earnings for Class 1 NICs. For NICs purposes, if such payments would have been MAPs if they had been paid to the employee, they may be exempt if they do not exceed the statutory limit.
   
   
3. Benefits provided by means of
   
   
   • a payment by the employer of the employer's liability, e.g. insurance under a fleet policy for the employee, or
     
     
   • the loan of an asset, e.g. a roof rack or a trailer

   are reported in full as benefits in kind and are subject to Class 1A NICs. They cannot be apportioned in respect of business and personal use. The employee must claim tax relief personally.
   
   

4. Payments made to the employee and payments of the employee's pecuniary liability but which must be repaid by the employee may be exempt under the beneficial loans rules. For NICs purposes, a loan made in connection with the business or personal use of the vehicle may be treated as a mileage payment and exempt if the statutory limit is not exceeded.

Employer's reporting and PAYE responsibilities

As described above, where the employer makes payments in connection with the acquisition and running of the car, there may be a requirement to

• report benefits in kind on form P11D and, where relevant, pay Class 1A NICs
  
  
• add payments to gross pay for PAYE tax and/or Class 1 NICs at the time the liabilities arise
  
  
• ignore certain benefits and payments where they qualify under an exemption.

None of these responsibilities are avoided where activities in connection with the scheme are performed by the ECOS provider, e.g. collecting mileage payment records and assessing them for tax and NICs liabilities. It is not possible for the scheme provider to operate a separate PAYE scheme in respect of ECOS tax and NICs liabilities.

No monetary payments to employees under an ECOS may be included in a PAYE Settlement Agreement, although other benefits could be included.

...UK Payroll News - Latest

Further information:
Employee Car Ownership Schemes

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