Do employee car ownership schemes still have a place?

Not that long ago employee car ownership schemes (Ecos) had begun to replace company cars in the UK, however, the rise of salary sacrifice car schemes appears to have halted this ascent.

Ecos are defined as a structured cash-for-car scheme. Ownership of the car passes to the driver at the outset of the agreement, in return for which they must make repayments covering finance and maintenance. These are often underwritten by a corporate guarantee.

In some cases the employer will make monthly cash payments to the driver, which are then used to fund the employee’s finance and maintenance repayments.

The definition that HM Revenue and Customs adopts is: “…a set of arrangements whereby employees acquire cars from a specified, often single source and within a specified financing framework.”

Jon Burdekin, head of consultancy services at Alphabet, says: “It is a much lighter touch for the employer with low risks, with the scheme agreement sitting with the leasing company and the individual. We would have a direct debit in place with the member of staff, it is almost like a retail transaction.”

Complexities involved in running Eco schemes

Although the Eco funding method remains in a number of leasing providers’ tool kits, they are not as popular as they were a decade ago.

Demand for such schemes has reduced due to a number of reasons, including complexities involved in their running. Also, there is often a misconception among employers as to what constitutes an Eco scheme and how to avoid falling into any potential financial traps.

John Pryor, chairman of the Association of Car Fleet Operators (ACFO), says: “Demand for Eco schemes has reduced because of complexity around their administration; the cost savings as a replacement for company cars, promoted by many providers, did not accrue in the real world; concern around employees driving their own cars on business, from a road risk management perspective, and the fact that Eco funding was calculated using mileage rates.”

In an increasingly environmentally focused and cost-conscious fleet arena, which has seen the rise in popularity of low-CO2-emitting cars offered via salary sacrifice arrangements , Eco schemes are being starved of take-up and, in some cases, are being replaced as a result of the tax efficiencies available through salary sacrifice arrangements.

Alastair Kendrick, director at MHA MacIntyre Hudson, says: “[Ecos] seem to have been relegated to the conference league in light of salary sacrifice. At present, a lot of employees pay a limited amount of tax on low-emission cars, so interest in Ecos is limited.”

Pryor adds: “Employers that have implemented Eco schemes have withdrawn these and reintroduced atraditional company car policy focused on low-emission cars complemented by a salary sacrifice [arrangement].”

Interest-free loans

Having said that, a number of cars are still provided through Eco schemes. According to Alphabet’s Burdekin, this makes up some 12% of its core business.

Eco schemes can be more cost effective and useful for employers that have employees covering high mileage in their company cars. Employers can also make cost savings if staff take up the£10,000 interest-free loan allowance offered by their employer to help them fund a car. Employers can then top this up by a third-party finance arrangement. As the cost of finance is reduced, savings will increase.

Burdekin says: “Interest-free loans make Ecos even more competitive. Employees can get a maximum of £10,000 tax free, which means we, as providers, can reduce the cost of the car by that amount, making the interest lower for the period of the loan and at the end give the £10,000 back. It helps make an employee’s loan payments cheaper.”

Ecos are also benefiting from employers offering schemes with blended funding arrangements.

Insurer Axa, for example, structures its car scheme for all employees around three funding methods: employee car ownership, contract hire and a salary sacrifice scheme.

Andrew Kirby, commercial director of employee benefit schemes at Zenith, says: “Through blended funding methods, different solutions can be used for different drivers. This means that the car will be funded by whichever method is the cheapest at the time of order, which could mean an Eco scheme, or another method.”

International accounting standards

The popularity of Ecos could see a considerable rise if, and when, new international accounting standards are introduced, although no date has yet been set for this.

These proposed standards will mean that employers will have to split their lease costs into the finance elements, which will then be entered on to the organisation’s balance sheet, and maintenance and management fees, which will be reported on its profit and loss account.

If this is the case, contract hire could potentially decrease in popularity, because schemes operating under such circumstances will need to appear on balance sheets.

Kendrick adds: “It should be borne in mind that Eco scheme interest is likely to grow in the next five years because of the international accounting standards. Cars on traditional lease, including salary sacrifice, will appear on balance sheets. This may create interest in Ecos which will not need to be reported.”