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HMRC internal manual

Employment Income Manual

From
HM Revenue & Customs
Updated
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Employee Car Ownership Schemes (ECOS): employer's PAYE responsibilities

Introductory remarks, common to this section of the guidance

Unlike car benefit (EIM23000) and car fuel benefit (EIM25500), no single body of legislation deals with ECOS. Instead, the relevant law when considering ECOS is drawn from various parts of the employment income and NICs legislation.

This guidance does not attempt to cover all relevant parts of the legislation in detail. Instead, it seeks to draw the essential aspects together in order to identify where tax and/or NICs can be payable under the normal benefits and expenses rules as they apply to ECOS.

The same principles apply to ECOS vehicles as to any privately-owned vehicles used for business travel.

Unlike the remainder of this manual, EIM31500 to EIM31599 cover both tax and NICs.

ECOS: employers’ PAYE responsibilities

As part of an ECOS, employers may directly pay their employees amounts in connection with the acquisition or running of the car. The different kinds of transaction in favour of the employee are detailed at EIM31520.

The amounts may be different for tax and NICs, but the transactions can fall into these kinds:

  • PAYE income for tax and earnings on which Class 1 NICs are due
  • benefits in kind for tax and NICs
  • earnings liable for Class 1 NICs but reportable on P11D for tax
  • exempt from tax and NICs.

All amounts which consist of PAYE income for tax or are earnings on which Class 1 NICs are due must be dealt with through the employer’s PAYE scheme in each earnings period. They cannot be put on one side to be reconciled at the end of the tax year.

An ECOS scheme provider may assist an employer by collecting employee business mileage records and working out what part of the payment made to an employee in connection with an ECOS is taxable as PAYE income and liable to Class 1 NICs.

But the employer is still responsible for recording the taxable and NICable amounts on the deductions working sheet prepared for the employee in connection with wages or salaries, recording the tax and NICs due, and accounting for the tax and NICs to HMRC. This is because Reg 66(2) of the Income Tax (PAYE) Regulations 2003 (SI 2003/2682) states that:
“The employer must, on making a relevant payment to the employee, prepare a deductions working sheet (unless he has already done so)”.

If the payments made under ECOS are either PAYE income for tax or earnings on which Class 1 NICs are due, they must be entered on the deduction working sheet (DWS) operated by that employer. The employer cannot run two DWS for the same employee. Each employee must therefore be in one, and only one, PAYE scheme.

Separate PAYE schemes for ECOS payments not permissible

It follows that a separate PAYE scheme for the employer in respect of the ECOS payments should not be agreed and PAYE schemes should not be opened in the name of the provider in relation to the ECOS payments. This includes ‘Free of Tax’ schemes and other special arrangements.