Government has announced a major policy shift affecting Employee Car Ownership Schemes (ECOS), which will take effect from 6th October 2026.
Why are the rules changing?
HMRC has identified a growing trend of ECOS being used to avoid tax on company cars
ECOS arrangements were designed to avoid benefit in kind (BiK) charges by transferring ownership of the vehicle to the employee on day one of the scheme with payment being made through a credit arrangement, often via a third party.
These structures, the government says, do not reflect genuine ownership and are primarily designed to exploit tax loopholes.
As a result, it is introducing legislation to prevent such practices.
What are the changes?
From October next year, ECOS will be subject to BiK tax under the company car rules if any of the following conditions apply:
- They restrict private use of the car or van;
- Someone other than the employee or member of their family or household is the registered keeper of the vehicle; and/or
- The employee or member of their family or household may, after a period of time or in certain circumstances, sell the vehicle for an amount determined in accordance with the ECOS’s rules.
HMRC say that private use of a company car is a valuable benefit, and it is right that the appropriate tax is paid on it. It says that the new legislation will ensure fairness with other taxpayers, reduce distortions in the tax system, and reinforce the emissions-based company car tax regime which incentivises the take-up of zero emission vehicles.
Who will be affected?
Almost 80,000 individuals who currently receive cars through ECOS will be affected as they will become liable for the Income Tax associated with the benefit.
These individuals may now need to pay the appropriate BiK charge or seek an alternative arrangement with their employer.
They may choose to retain the current vehicle through a normal car scheme, choose a lower emitting (lower tax) vehicle or choose to go without a company car altogether.
Where their employer continues to provide a vehicle through an ECOS arrangement, the scheme will now be taxable.
The draft legislation is open to consultation until 15 September 2025 giving employers an opportunity to communicate any practical issues or concerns to HMRC.
For further information or advice please contact enquiries@cowgills.co.uk.
