Ahead of the Autumn Budget, the Government published draft legislation on 21 July (also known as ‘L’ Day) on Employee Car Ownership Schemes (ECOS). While many employers offer a company car scheme to some directors or employees, an ECOS differs in that the director or employee owns the vehicle rather than the employer, and this distinction impacts the tax treatment.

Currently, these schemes are particularly popular in the motor sector, where cars may be sold to employees for less than their market value. It may be that the car is used by the director or employee themselves or a member of their family or household.

As well as incentivising employees, a motor manufacturer or dealer might have other business reasons for running an ECOS, such as enabling the director or employee to be more familiar with the car and provide feedback to help shape future improvements.

The Government however believes that ECOS are being used as part of a tax ‘loophole’ to avoid company car benefit charges. The ‘L’ Day announcement will change the rules from 6 October 2026.

Current tax treatment

Under the existing tax rules, a car provided under an ECOS is not subject to tax as a company car benefit as the ownership of the vehicle is transferred to the director or employee, typically under a credit sale agreement. There is normally an arrangement for the employer to buy back the car at an agreed time, with the proceeds being used towards the settling of the outstanding loan.

While they own the car, the director or employee makes payments towards the loan, which is taxed under the beneficial loan rules rather than the company car benefit rules. This generally means that the benefit in kind is much lower, as it is the loan balance that is taken into account when calculating the benefit, rather than the list price and CO2 emissions of the car.

As the vehicle is in the employee’s name, they can claim mileage allowance in the same way as they would for business mileage travelled in any other car they own personally. In some cases, this will be offset against the amount the employee pays towards the repayment of the loan. 

What will change in October 2026

Under the new rules, a car benefit will instead arise even when the employer has transferred ownership of the vehicle to the director or employee and any of the following apply:

• The employer puts restrictions on the private use of the car; or
• As part of the agreement there is an arrangement for the car to be bought back by the employer or otherwise sold onwards after a set period of time; or
• Where neither the director or employee or a member of their family or household is the registered keeper of the vehicle.

While the new rules are intended to target ECOS, they will apply equally to vans provided to a director or employee or a member of their family or household. But as van and van fuel benefits are much lower than car and car fuel benefits, it is presumably less likely that an employer would set up an employee van ownership scheme and the number of vans affected by the change could be far smaller.

Planning for the change

If you operate an ECOS or a similar arrangement for vans, it would be worth taking time to look at the impact the changes might have ahead of October 2026. This could involve planning for the cash flow impact of increased benefit in kind charges, exploring how an ECOS arrangement could be restructured or possibly changing the vehicles involved. For example, changing to an electric car or a car with lower emissions could reduce the benefit in kind exposure once the new rules take effect.

This article reflects the position at the date of publication. If you are reading this at a later date you are advised to check that that position has not changed in the time since. 

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