Managing Corporate Employee Car Benefits
What are the options?Tags: Corporate ECOS
Most companies will be aware of the well-established options for employee car benefits – company cars, salary sacrifice and contract hire. But, perhaps the lesser known option, an employee car ownership scheme is worth considering to assess if it is the right option for your business.
Employee Car Ownership Scheme (ECOS)
Unlike other employee car provision options, in an ECOS, the employee is the owner of the car from the outset. As the vehicle is owned by the employee and they make repayments on the car, an ECOS removes the company car tax liability for the employee and the cost of Class 1A National Insurance Contributions (NICs) for the employer. This provides significant business savings in comparison to the traditional company car schemes. These savings can be shared with employees at the employers’ discretion.
As the cost of company car tax increases, particularly for essential users in ICE vehicles, ECOS is becoming a more cost-effective option for both employers and employees. This ECOS structure is recognised by HMRC, to read more about it, click here.
For a long time, traditional internal combustion engine (ICE) company cars have been the norm. Businesses offer their staff cars for a number of reasons including to reward and retain them, a necessity for those with ‘on the road’ job roles, or as an alternative to a pay rise. However, the cost of providing ICE company cars to employees has steadily risen over the past few years. The introduction of electric vehicles (EVs) as company cars has lowered the tax liability, but the higher total cost of ownership means this isn’t always a cost saving option. Therefore, businesses are beginning to look into other options.
For employers, the average business cost for an ICE company car is now £740 per vehicle per month. A lot of which can be explained by the changes in Class 1A NICs. The bill from HMRC increased from £470m in 2010-11 to £670m in 2017-18. HMRC predicts that the cost of NICs for employers is going to continue to rise.
With annual increases in Benefit-in-Kind (BIK) tax since 2015, tax bands being calculated in line with The Worldwide Harmonised Light Vehicle Test Procedure (WLTP), pushing vehicles into higher emission bands, it will come as no surprise that drivers have incurred more costs, too.
The average taxable value of a company car has almost doubled since 2010, from £3,850 to an average of £6,030, so an employee can expect to pay approximately £1,790 in company car tax per year. However, for higher tax payers, the tax liability can be much higher.
There is evidence that all these figures are having an impact as the number of company car drivers has declined by 3% over the last 12 months.
Similar to company cars, most people in the corporate business world will be familiar with the concept of salary sacrifice – when an employee gives up a portion of their gross salary in exchange for an alternative benefit, normally with the aim of saving tax and National Insurance (NI). Tax and NI savings will be made on the sum that has been sacrificed, and the value of the car benefit for employees, is subject only to BIK tax. However, employers are still required to pay Class 1A NICs.
The current Operational Remuneration Arrangements (OpRA) state that anyone who enters a salary sacrifice agreement must pay income tax on the greater of the taxable value; the vehicle or the salary being sacrificed for the car. The exception to the rule is ultra low emitting vehicles (ULEVs), for which, OpRA doesn’t currently apply.
The introduction of OpRA legislation in 2017 reduced the savings available through salary sacrifice, which made the scheme much less appealing for ICE vehicles. However, for electric vehicles (EVs) and ULEVs the opposite is true, as the monthly tax liability is lower in comparison to ICE vehicles. Despite the lower tax burden though, the EV total cost of ownership is likely to be higher than that of its ICE equivalent.
This cost recovery can be in the form of salary sacrifice (subject to prevailing OpRA rules), or by way of a net salary deduction via an ECOS. The employer and employee must realise that any benefits of a gross salary sacrifice may not endure the full vehicle term should OpRA rules change.
Contract hire is a car leasing finance option, available to sole traders, partnerships and limited companies. VAT registered companies are able to claim back 50% of the VAT on finance lease rentals making this a popular choice for these companies. Contract hire consists of two parties agreeing to a leasing agreement, with the leasing company providing the car for a set period of time (usually 2-4 years) at a fixed monthly cost.
Car Benefit Solutions is a specialist provider of employee car benefits, so if you would like more information about how we can help you and your corporate fleet, please contact: firstname.lastname@example.org