If you work for a supermarket, you and a family member can get discounts on your shopping. If you work for an airline, you and your family members, friends can benefit from free or cheap flights. And if you work for a car company, you might get the chance to take part in an Employee Car Ownership Scheme (ECOS), allowing you and your family to run a brand-new car at a cut-down price.
Company perks are a big part of employment, making it easier to attract and retain staff. But the government is targeting car company (and car retailer) workers, proposing to charge them the full rate of company car tax on the cars they run, which could have a knock-on effect for people looking to buy used cars, as well as causing employment problems.
A proposal in new draft legislation would effectively end ECOS – a popular benefit for thousands of workers across the UK car companies and dealer groups. These schemes provide employees with access to new vehicles at preferential rates, with cars typically being run for six to nine months before being returned and sold on through franchised dealer networks.
It’s a system that ensures a steady pipeline of nearly-new, low-mileage used vehicles to the market, which means more cars are produced in UK factories and provides government income in the form of VAT and vehicle excise duty. But the government now wants to treat it as a full-blown taxable company car benefit, potentially adding thousands of pounds to employees’ tax bills.
Mike Hawes, CEO of car industry trade body SMMT, told The Independent, “The removal of Employee Car Ownership Schemes would severely damage the automotive sector and its workers at a time when the industry is under immense pressure.
“Both new and nearly new used car markets would be reduced, UK production cut and jobs lost. At a time when the government is trying to raise revenues, removing this scheme would actually cost it millions through lost VAT and VED receipts.
“Ultimately, however, it is thousands of working people and their families who will be hit hardest, as they lose access to the vehicles they make and need to access work.”
Vertu Motors, one of the UK’s largest car retailing groups, has already warned its shareholders that the proposed ECOS changes could cost the business up to £2.5m, with up to 250 members of staff taking advantage of its ECOS scheme.
Vertu chief executive Robert Forrester, who has been to HM Treasury to consult on the ECOS plans, described the government’s plans as “completely counter-productive”.
“We have written them a letter explaining to them that this will lead to a significant fall in the new car market – it’s currently, we believe, five per cent of the total new car market,” said Forrester.
Vertu has also estimated that the changes would reduce taxation income into HMRC by more than £7.0m per annum for Vertu’s volumes alone, primarily in lost VAT.
Martin Ward, journalist and car industry insider, told The Independent: “If it wasn’t for this scheme, a lot of staff would be running six- or seven-year-old cars for five or six years. They wouldn’t go near a new car. The scheme makes that possible – and then it feeds the used market with good-quality, low-mileage vehicles.”
Estimates suggest that HMRC’s move could see the number of nearly new cars entering the used market plummet by as many as 200,000 vehicles a year – as workers step away from ECOS deals. That shortfall in supply is likely to inflate prices for used cars across the board, at a time when affordability is already stretched for many drivers.
Manufacturers and leasing firms typically process hundreds of ECOS cars a day. Ward cites examples like Volkswagen Financial Services, where up to 100 vehicles are registered daily through staff schemes across all Volkswagen brands, including Bentley, ensuring a flow of fresh stock to dealers. “You go to the Bentley factory car park – they’re full of VW Group vehicles on green plates – electric cars. Dealers love them. Salespeople rely on them. And it all works because of ECOS,” said Ward.
With fewer new cars registered through ECOS, the government not only stands to lose out on VAT, vehicle excise duty (VED), and luxury car tax on cars more than £40,000. There’s also lost income tax from dealer commission, reduced profit tax for retailers, and the risk of economic contraction if new car sales figures fall by up to 10 per cent – a real possibility if ECOS cars disappear from the data.
Ward warned, “If you’re the Bank of England and suddenly you see new car sales drop by seven to eight per cent, you might think the economy’s going backwards. That could affect interest rate decisions. It’s all linked.”
But there’s another issue the government may not have accounted for: people.
With ECOS gone, employees will face the full cost of sourcing their own transport – often a used car that falls well short of the brand-new vehicle they’re used to driving. That threatens to make the industry a much tougher sell for new recruits and existing staff.
“The big employers in the UK – Ford, Nissan, Bentley – rely on these schemes to attract top talent,” said Ward. “People know they can get a new car every six months, drive it, and swap it out. Without that, you’re asking people to buy a £40,000 car with their own money. They won’t.”
In the government Policy Paper on changes to ECOS, the policy objective is described as “Private use of a company car is a valuable benefit, and it is right the appropriate tax is paid on it. This measure will ensure fairness with other taxpayers, reduce distortions in the tax system, and it reinforces the emissions-based company car tax regime which incentivises the take-up of zero emission vehicles.”
Ironically, the ECOS system is far from a tax dodge. Most schemes involve the employee taking out a company-facilitated loan to buy the car and paying tax on the interest. In some cases, the employer subsidises the vehicle or recycles demonstrator cars through the scheme. Crucially, HMRC itself approved the ECOS framework more than a decade ago.
The government’s own impact assessment says it expects to raise £270 million from the ECOS crackdown. Ward and others in the industry suggest that it could be a false economy. “When you add in all the lost tax revenue from fewer new car sales, lost dealer income, and even lost employment,” he said. “This could end up costing the government more than it saves.”
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