A storm is brewing over the tax-free utopia currently inhabited by 100,000 business motorists who are part of employee car ownership schemes.

For years, the schemes have offered the low cost equivalent of company cars to drivers, but without the burden of company car tax, thanks to skillful legal interpretation of tax law.
The idea is simple: ownership of the vehicle passes to the driver when they receive a car, so it can’t be classed as a benefit for tax purposes.

The employee saves hundreds of pounds a year in company car tax and the employer saves on National Insurance contributions.
In addition to drivers cutting their tax bill by moving to a company car, ECO schemes use approved mileage allowance payments to reimburse drivers for their business mileage.
These rates allow employers to reimburse drivers covering business mileage in a private car at a set pence-per-mile rate, which can be paid free of tax and National Insurance. So rather than an employer paying a driver a cash lump sum of £4,500,which would lose about one-third of its value in taxes, AMAPs are much more efficient.

Currently, employers can pay 40 pence per mile for the first 10,000 miles and 25p for any additional mileage, so a driver covering 15,000 business miles a year could claim £5,250 tax free, equivalent to a lump sum of more than £6,700 to a 22% taxpayer.

But there are concerns over how long this will last. In this year’s Budget, Gordon Brown announced that the Treasury was planning a review of its tax position on ECO schemes.
HM Revenue & Customs recently asked fleets to help it develop its future tax policy towards the schemes, showing it was open to negotiation, but the move has set alarm bells ringing in the industry.

In a statement released by HMRC, it said the review would look at how the schemes work, including financial arrangements, what factors have contributed to the expansion of such schemes and what impact they have on CO2 emissions and local air quality when compared to company cars.

Industry opinion is divided on the environmental impact of ECO schemes, as they sidestep one of the most effective environmental taxes introduced by the government – carbon dioxide-based company car tax.

At its most basic level, the tax operates by ensuring drivers who pollute more, in terms of
CO2, pay more tax. Moving to an ECO scheme and removing that particular tax burden allows drivers to choose a less fuel-efficient car without penalty, although fuel taxation and vehicle excise duty have an impact.

In addition, the government is losing hundreds of millions of pounds in tax revenue as drivers fall out of the company car tax system. Experts point out that the short fall may still be made up in other areas, such as through tax on cash allowances, but it is a difficult tax trail to follow.

Health and safety

Then there is the growing debate about health and safety and the vital importance of companies taking ownership of vehicle and driver safety. In recent years, companies have been warned that they must take responsibility for employees driving on business, even if they are in a private vehicle.

Core responsibilities include ensuring the employee is in a vehicle that is fit for purpose, that they have been trained in use of work equipment and, as far as it is possible to check, that they are properly licensed and insured.

Recent research warned that at least one in 100 company car drivers is driving illegally without a valid licence, which emphasises how difficult it is to monitor drivers in company owned vehicles.

There are also concerns that there will be a reduction in AMAP rates, which will drastically affect ECO schemes. However, the rates are intended to reflect the cost of fuel and also cover depreciation, insurance costs and maintenance, so they are not overly generous compared to average vehicle running costs.

ECO specialists, such as Whitechapel and Provecta Car Plan, argue that companies in properly run schemes have nothing to worry about. A good scheme should deal with risk management issues, by providing services such as automatic insurance, offer simple licence checking schemes and paid-for servicing within the four monthly vehicle finance payments. But this hasn’t stopped a high profile claim that the company car will make a major comeback in the next few years as ‘duty of care’ concerns and government measures increase its attractiveness.

In a major report by professional advisers Deloitte, entitled Goodbye Company Car?, Alison Chapman, head of automotive tax at Deloitte, says: ‘In the future, the company car will not be confined to the scrapyard. The government has made it clear that it wants the company car to remain a key part of the corporate landscape.’

The report interviews some of the most high-profile figures in the fleet market to reach its conclusions, with experts predicting a swing back into company cars this year.
They admit that opt-out schemes have a role to play in the workplace, but argue that, for many, the company car offers a guarantee that at-work drivers have properly maintained and insured vehicles.

Writing in Goodbye Company Car?, Professor Peter Cooke agreed that the government would act to protect its tax revenues. ‘I think the government may look at both the rise of cash-for-car alternatives and ECO schemes and try and find ways to push employees back into company cars, ’he said.

However, Chapman warned that there was no one-size-fits-all solution to fleet funding.

‘Flexibility in the provision of corporate transport solutions has become crucial to companies and their employees, but both parties have frequently failed to analyse in detail the full implications of opting out or staying loyal to the company car. ‘This issue is far from a straightforward decision.

Too many companies have tried to treat the choice as an either-or option and, as a consequence, have paid the price in terms of rocketing costs, administration overload and disgruntled employees,’ she said.

And there are early warning signs that the government is cracking down on ECO schemes. HMRC is becoming more demanding about which ECO schemes meet its rules and which do not, with companies now expected to provide monthly accounts proving that their tax-free AMAP payments to drivers match the mileage they have covered.

Those not meeting the standard could become liable for a large, back-dated tax bill. ECO provider Masterlease says the tightening of reporting schemes shouldn’t be a cause for alarm. Gordon Calder-Jones, head of Alto, Masterlease’s own ECO scheme, says:
‘Some of our ECO customers have already received letters from HMRC asking for monthly reconciliation with some challenging deadlines. Accounting for tax and National Insurance contributions each month presents an administrative burden and the sheer task of getting driver mileage in each month could far outweigh any cost saving benefit from the scheme. So, we have spent a considerable amount of time developing our own solution to enable us to handle the process for our customers and any other ECO fleet.’

These challenges add to the administrative costs of running ECO schemes, which chip away at the savings companies can expect. This is in addition to the extra administration involved in explaining to drivers how the scheme works and dealing with their queries.

HMRC is now considering the results of its consultation, carried out in June, and the outcome of its deliberations will be eagerly awaited by fleets and suppliers alike, especially those already involved in the ECO market.

Alastair Kendrick, tax partner at Wilder Coe, says: ‘I have not heard anything to suggest that there is any intention to close down ECO schemes, but going forward there may be some restrictions on some of the tax planning around them.

‘I hope that coming out of the consultation is clear guidance on what can and cannot be done, with clear instructions to inspectors in local districts. I also hope that some of the issues faced by employers due to Revenue red tape can be addressed.’