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If you work at a supermarket, you and a family member may be able to get a discount on your purchases. If you work for an airline, you and your family members and friends can benefit from free or cheap flights. And if you work for a car company, you may have the opportunity to participate in the Employee Car Ownership Scheme (ECOS), which will allow you and your family to drive a new car at a lower cost.
Company perks are a big part of employment, making it easier to attract and retain employees. But the government is targeting car company (and car retailer) employees, and is proposing to charge them the full rate of company car tax on their cars, which could have a knock-on effect on people looking to buy used cars, as well as create employment problems.
A proposal in new draft legislation would effectively end ECOS – a popular benefit for thousands of workers at UK car companies and dealer groups. These schemes provide employees access to new vehicles at preferential rates, with the cars typically being driven for six to nine months and then returned and sold through the franchised dealer network.
It is a system that ensures a steady pipeline of nearly new, low-mileage used vehicles to the market, meaning more cars are produced in UK factories and providing income to the government 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 Independent“Removing employee car ownership schemes will cause serious harm to the automotive sector and its workers at a time when the industry is under extreme pressure.
“Both the new and near-new used car markets will be decimated, cutting production in the UK and losing jobs. At a time when the Government is trying to raise revenue, removing the scheme will actually result in millions in losses through lost VAT and VED receipts.
“Ultimately, it is thousands of working people and their families who will be most affected, as they will lose access to the vehicles they own and need to get to work.”
Vertu Motors, one of the UK’s largest car retail groups, has already warned its shareholders that the proposed ECOS changes could cost the business up to £2.5 million in losses, with more than 250 employees taking advantage of its ECOS scheme.
Vertu chief executive Robert Forrester, who has gone to HM Treasury to consult on the ECOS plans, described the government’s plans as “completely counterproductive”.
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“We have written a letter to them explaining that this will lead to a significant decline in the new car market – we believe it is currently five percent of the total new car market,” Forrester said.
Vertu has also estimated that the changes will reduce HMRC’s taxation income by more than £7.0 million per year for Vertu’s volume alone, primarily in lost VAT.
Journalist and car industry insider Martin Ward told Independent: “If it weren’t for the scheme, a lot of workers would be driving six or seven-year-old cars for five or six years. They wouldn’t go to a new car. The scheme makes that possible – and then it floods the used market with good quality, low-mileage vehicles.”
Estimates suggest that HMRC’s move could reduce the number of new cars entering the used market by almost 200,000 vehicles per year – as employees are drawn away from ECOS deals. The reduction in supply is likely to push up used car prices around the world, at a time when affordability is already at a premium for many drivers.
Manufacturers and leasing companies typically process hundreds of ECOS cars a day. Ward cites examples such as Volkswagen Financial Services, where 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. The dealers love them. The salespeople trust them. And it all works because of ECOS,” Ward said.
With fewer new cars registered through ECOS, the government will not only lose out on VAT, Vehicle Excise Duty (VED), and luxury car tax on cars over £40,000. There is also a reduction in income tax from dealer commissions, a reduction in profits tax for retailers, and the risk of economic contraction if new car sales figures fall by 10 per cent – a real possibility if ECOS cars disappear from the data.
Ward warned, “If you’re the Bank of England and suddenly see a seven to eight per cent fall in new car sales, you might think the economy is going backwards. That could affect interest rate decisions. It’s all linked.”
But there is another issue that perhaps the government has not taken into account: the people.
With ECOS gone, employees will face the full cost of sourcing their own transportation – often a used car that costs significantly less than the brand-new vehicle they are accustomed to driving. This threatens to make the sale much harder for new recruits and existing employees in the industry.
“Big employers in the UK – Ford, Nissan, Bentley – rely on these schemes to attract top talent,” Ward said. “People know they can get a new car every six months, drive it and swap it in. Without that, you’re asking people to buy a £40,000 car with their own money. They won’t do it.”
in government policy paper Changes in ECOSThe policy objective is described as “Private use of a company car is a valuable benefit, and it is right that appropriate tax is paid on it. This measure will ensure fairness with other taxpayers, reduce distortions in the tax system, and it strengthens the emissions-based company car tax regime that incentivizes the take-up of zero-emission vehicles.”
The irony is that the ECOS system is far from tax evasion. Most plans involve the employee taking a company-facilitated loan to buy a car and paying taxes on the interest. In some cases, the employer subsidizes the vehicle through a scheme or recycles nonperforming cars. Importantly, 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 action. Ward and others in the industry suggest this may be a false economy. “When you add up all the lost tax revenue from lower new car sales, decreased dealer income and even decreased employment,” he said. “This could end up costing the government more than it would save.”