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Company carsPay & benefitsPre-employment screening

Is employee car ownership dead or resting?

by Laura Chamberlain 17 Aug 2011
by Laura Chamberlain 17 Aug 2011

Jim Salkeld, chairman of Opticar, tells Laura Chamberlain why he believes that employee car ownership (ECO) schemes have failed to deliver in the past and why a revival is due.

ECO schemes allow employers to offer an alternative to company cars, in which the employee owns the car and receives a budget from the company to fund it. It is similar to a car allowance scheme but employees can choose a new car from a range that includes some company negotiated discount terms.

In ECO schemes, the budget for the car is paid for through a combination of Approved Mileage Allowance Payments (AMAPs), which are free from tax and national insurance contributions, employee contributions equivalent to company car tax on a benchmark car, and a cash balance. The idea being that the employee is in a “salary neutral” position compared to having a company car.

According to Salkeld, the complexity of the schemes have put off some employers in the past. He explains, however, that this shouldn’t deter organisations from implementing ECO schemes.

“They don’t have to be that complicated,” Salkeld explains. “If you pick a good third-party supplier, then there shouldn’t be any requirement for admin other than the monthly payroll, and anything else can then be taken care of. The best advice is don’t try and do it on your own because it can be really hard work if you do, and a specialist third-party has the experience to manage the scheme effectively.”

Tax has also been a big factor in the popularity decline of ECO schemes as, in the past, some companies have got into trouble with HM Revenue & Customs (HMRC) over them.

According to Salkeld, the key to avoiding such errors lies in how the schemes are set up.

“In the past, it’s all been about compliance and whether too many, or insufficient, AMAP payments have been made, because they’ve been based on ‘guesstimates’. Anyone who sets up a scheme should really write to HMRC and say ‘this is what we’re planning to do. Are you ok with it?'”

But tax and complexity are not the only factors that have been holding back the ECO scheme. Salkeld argues that the biggest problem facing these schemes is the rumour mill, stirred up by those who have found the schemes costly in the past.

“ECO doesn’t work if you have very low business mileage – you pay more than you need to be paying. That’s where employers tend to fall over. They have a sole ECO scheme instead of it being optional alongside company cars or company car allowance and they suddenly find after a few years that it’s cost them a fortune.

“No employer should be thinking of going all ECO, or all company cars for that matter, if they want to do it properly. The use of ECO should be as a means of reducing your fleet cost but keeping some value in the benefit for employees as well.”

Salkeld says that the best way to use an ECO scheme is to give the employee the option of using it, and to build in some safeguards. For example, employees with a low business mileage should still be able to participate, but with a reduced budget to keep company costs level with a company car.

He adds that a good move to make is to narrow down the number of manufacturers the employee can choose from across ECO and company car schemes.

“If you try and manage a fleet in-house, the best thing to do is to try and hone the company car choice down to as little as possible. If you’ve got a 100- or a 50-car fleet that goes ‘solo badge’ then you’re going to get good terms from the manufacturer, a reduction of 25% or more in some cases.

“Those are really good discount terms and that will be available for the ECO cars as well but will need a lower budget to stay ‘salary neutral’ when selecting those cars from the same manufacturer. That really does reduce company costs significantly, without eroding the benefit.”

What does the future hold for the ECO scheme?

Are they soon to be added to the heap of forgotten employee benefits? Salkeld thinks not: “ECO schemes are almost notable when anybody mentions them because there are so few companies actually adopting them, but I think that’s because those companies who do adopt them, or have done in the past, tend to adopt them wholesale and not use them as part of a combined benefit, which is really where they’ve got their power.

“In due course, they have to make a comeback. This is for two reasons really. One of them is that we know company car tax is increasing. As this happens, the ECO option becomes more valuable for the employer and less costly for the employee as well.

“And the other aspect is the possibility that fuel costs will start to come down and/or AMAPs will increase to meet additional costs. At the moment the benefit can be quite slim on low emission cars.”

However, Salkeld warns that if ECO schemes do become more popular, employers should still use them as part of a combined benefit and not as their only company car offering.

“It is a great thing to have alongside other car benefits and it won’t cost any more than providing a company car; it could even cost less. It will increase the value and flexibility of the benefit for the employee, particularly where the company car choice is restricted.

Employers can find out more about implementing a company car, ECO or car allowance scheme from Personnel Today’s Buyers’ guide.










Five benefits of ECO schemes as part of a fleet package


1. The ECO car is heavily discounted by the manufacturer supporting the scheme to make it attractive to the employee, so the necessary budget to keep an employee salary neutral against the company car tax payable on the company car is reduced.

2. By providing an alternative range of lifestyle car options to employees, the employer can negotiate heavy discounts for limited-badge or Solus deals.

3. The ECO car comes with a maintenance package and full business-use insurance so is similar to the security of a company car both for the employee and for the employer (for occupational road risk management).

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4. If an employee resigns the car doesn’t become a problem for the employer.

5. A properly structured scheme that is managed entirely by a third-party provider can minimise administration and eliminate risk.

 

Laura Chamberlain

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