• Flexible – flexible contract to suit business cash flow needs.  Limited costs for ending contracts early and option to enter a secondary lease period.
• VAT – Usually, provided acquisition of title is optional rather than obligatory, VAT should be payable on each lease rental.  VAT recovery on the lease rentals (50% block on the finance element for cars).
• Corporation Tax – Corporation tax relief available against the lease rental charges.
• Return Conditions – no additional costs for mileage or vehicle condition (although these factors will impact the residual value of the asset)

1. Residual value – risk and reward for the vehicle is with the lessee.
2. Early termination – “interest equalisation” penalties for early termination of the vehicle.
3. Often requires a pay on use maintenance package rather than a fixed pricce package.

1. Fixed Price – fixed contract prices mean it is easier to budget and forecast your costs.
2. Small Deposit – low initial rentals are available, helping with cash flow requirements.
3. Low risk – the lessor takes the residual value and maintenance risk.
4. Tax – tax relief in the form of capital allowances.
5. Administration – the lessor takes on the majority of the vehicle administration tasks.

1. VAT – upfront VAT cost, as the supply of goods, not services.  VAT is ordinarily fully blocked.
2. Excess Mileage – vehicles exceeding their contracted mileage will be liable for excess mileage payments.
3. Return Condition – the vehicle needs to be returned in a suitable condition and according to BVRLA fair wear and tear standards. Otherwise, charges can apply to return the vehicle to a suitable condition.
4. Limited ability to amend the contract parameters within the vehicle lifecycle.

The most common reason for a company to consider using an ECOS is the level of potential savings it could offer in contrast to providing cars through a traditional company car scheme. If the correct fleet profile is present, potential employer savings could be significant. A ‘correct fleet profile’ has a low cost of car provision and high business mileage. However, it is critical to be aware that when operating an ECOS, if the correct fleet profile is not present, it can potentially cost significantly more than a traditional, well-designed company car scheme.

When it comes to implementing and operating an ECOS, it is likely to be much more complex than a traditional company car scheme for several reasons. This may include:

1. The employee will sign a contract to take ownership of the car, involving potential complications such as credit checks on employees.
2. Whether the employee wants to own the car their company provides.
3. The fleet finance within an ECOS tends to be a mix of employee loans, Approved Mileage Allowance payments (‘AMAP’) and gross salary. Therefore, it is essential to calculate all PAYE and National Insurance Contributions (NIC) to ensure HMRC compliance correctly.
4. Due to the complexity of ECOS arrangements, they can be challenging to explain to employees. So, administration requires more resources.

If the implementation and operation of an ECOS is solid, it can offer a cost-effective alternative to providing company cars. However, implementing and operating an ECOS can be a complex process. Therefore, it is crucial for any company considering an ECOS to carefully consider the benefits and risks of the arrangement in detail before committing to any changes.

Due to its structure, the introduction of the OpRA legislation impacted most ECOS arrangements in place. At the time, the design of arrangements would allow the use of a variable cash top-up. However, under the OpRA rules, the Approved Mileage Allowance payments (‘AMAP’) meant that an ECOS with a variable cash top-up were no longer exempt from income tax. With this loss of tax efficiency, this type of ECOS was no longer effective.

However, it is worth noting that if the ECOS does not rely on a variable cash top-up, it can fall outside the scope of the OpRA legislation and offer a viable alternative to providing company cars.

1. Flexibility – Full ownership of the car and no fixed contract.
2. End of Contract – No end of contract charges.

1. VAT – The upfront VAT cost, as the supply of goods, not services. VAT is ordinarily fully blocked.
2. Risk – Exposure to residual value risk.
3. Budgeting – Uncertain costs make budgeting more complex.
4. Cash Flow – Implication of the considerable upfront purchase cost.
5. Administration – Management of the vehicles (purchase, disposal and maintenance) can be time-consuming.

Low rates of company car tax

The introduction of low rates of CCT for zero-emission EVs and some PHEVs can result in very low BIK values for these cars. Compared to the income tax and NI that would have otherwise been due on the sacrificed salary, these arrangements can offer employees a financial advantage.

National insurance efficiency

Employers Class 1A NI liability for a company car is calculated based on the BIK value for the car in question. As noted above, the BIK value for a ULEV can be very low, so there may be a minimal NI cost associated with providing a ULEV company car. In contrast, an employer would pay Class 1 NI regarding the value of the salary sacrificed. This amount would likely be higher than the BIK for the company car. As a result, salary sacrifice for a ULEV can generate an NI efficiency for the business. Money can be kept as savings or passed on to employees at a reduced cost.

Purchasing power

When an employer provides company cars to employees, it can usually negotiate discounts based on the number of cars it will order from a particular provider or vehicle manufacturer. In general, the bulk buying power of an employer will result in greater discounts and lower prices for cars compared to an individual employee on the high street. Therefore, salary sacrifice arrangements can allow employees not typically entitled to a company car to access the bulk buying discounts of employers.

Employee benefits

As these cars are environmentally considerate, salary sacrifice schemes could appeal to corporate social responsibility agendas. There is also a growing public desire to drive ‘greener’ cars.

Risk management

Many business operators might also consider it more convenient, visible and controlled to manage individuals driving occasional business mileage in these brand new and fully managed company cars rather than in private vehicles. In addition, such an arrangement could reduce the number of “grey fleet” drivers. In grey fleet, management and tracking of health and safety obligations can prove problematic.

Environmental benefits

For employees, it is desirable to access these ‘greener’ cars at a much lower cost than in the retail environment. Salary sacrifice also provides fixed corporate insurance and no requirements for personal credit assessments. As these cars are company cars, maintenance will be in accordance with manufacturer guidelines, managed by the car lessor. Employees who have never experienced a company car before would undoubtedly appreciate the reduced hassle of car ‘usership’.

1. Flexibility – Greater degree of flexibility within the agreement.
2. End of Contract – No end of contract charges.
3. Risk & Reward – Potential residual value profit (compared to funding option with fixed residual value/balloon).

1. VAT – Upfront VAT cost, as the supply of goods, not services.  VAT is ordinarily fully blocked.
2. Risk – Exposure to residual value risk. Uncertain costs make budgeting more complex.
3. Administration – Management of the vehicles (purchase, disposal and maintenance) can be time-consuming.