At the last Budget, the Government announced that it planned to legislate for certain ECOS arrangements to bring them within the company car Benefit-in-Kind (BIK) rules. Draft Finance Bill 2025-26 legislation to implement this measure has now been published for consultation. If enacted as currently drafted, the new rules will apply to all cars made available under a relevant ECOS on or after 6 October 2026.
What employers need to know
In essence, an ECOS is typically designed to allow employees to purchase a car under a credit sale agreement with a guaranteed buy-back agreement. As there has been a transfer in ownership, the company car legislation does not currently apply to such schemes. The employee is provided with a loan for the purchase of the vehicle and the buyback agreement is used to repurchase the vehicle with the proceeds used to repay the outstanding loan.
The employee pays BIK tax based on the outstanding loan value, which is typically much lower than the BIK which would arise if the vehicle was a company car. ECOS that operate in this way, can potentially generate significant tax savings for petrol and diesel vehicles compared with company car taxation.
However, 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.
What should employers consider?
We envisage the majority of ECOS will be affected by the new legislation as they tend to have:
- Restrictions on private use;
- The provider is often the registered keeper of the vehicle; and/or
- There is a guaranteed buyback – typically at the value of the loan.
The scheme rules will only need to include one element of the above for the ECOS to be within the company car BIK rules post October 2026, but some schemes will include all three features. Whilst it may be possible to have no restrictions on private use as well as the employee to be the registered keeper, it will require a fundamental change to how most schemes operate to eliminate the buyback provisions.
Employers who currently operate an affected ECOS should consider whether it would be appropriate to continue to offer it after the company car BIK rules apply. If not, they should also consider what replacement benefit it might be appropriate to offer to maintain the attractiveness of their total employee reward offering.
How KPMG can help
The draft legislation is subject to consultation until 15 September 2025. This gives employers an opportunity to communicate any practical issues or concerns with the draft legislation to HMRC.
KPMG has extensive experience assisting employers to understand the tax implications of the various employee company car schemes. We can provide guidance on how the various schemes work and explain which option may best align to your organisation’s requirements.
We also have extensive experience around building employee total reward packages and can provide guidance on the alternative options, including salary sacrifice arrangements for low emission cars as well as moving to cash allowances, that can be used to ensure that you remain competitive in terms of the benefits and incentives you offer.
Please contact the authors, or your usual KPMG in the UK contact, if you would like to discuss the potential impact of these prospective new measures on your business, or if there are any matters you would like us to consider reflecting in any submissions we make to HMRC on the draft legislation.
For further information please contact: