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HMRC internal manual

Employment Income Manual

Employment income provided through third parties: exclusions: employee car ownership schemes: conditions

Section 554O ITEPA 2003

The arrangement condition
‘Car’ and ‘licensed lender’
The purchase condition
Other reliefs for ECOS

Employee car ownership schemes (ECOS) which meet the conditions in Section 554O do not give rise to Part 7A income.

‘Employee car ownership schemes’ are not defined by law, and take a variety of forms. They are often attractive to employees as tax efficient arrangements but this on its own does not prevent the exclusion for employee car ownership schemes from applying. You need to check whether the ECOS under review meets the arrangement condition and the purchase condition.

If the ECOS meets the arrangement condition and the purchase condition, Section 554O gives conditional relief. See EIM45235.

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The arrangement condition

The arrangement condition is in Section 554O(1)(a). It focuses on the car ownership arrangement. It is in six parts, all of which must be met. These six parts are bulleted below.

  • There is an arrangement which provides for A to purchase a new car from another person (P) using a car loan.
  • A ‘licensed lender’ is to make the car loan to A.
  • The arrangement specifies the date by which the car loan must be fully repaid. This must be no later than four years after the date on which the car loan is made.
  • The arrangement permits A to sell the car back to P:

    • in order to obtain funds to repay the car loan,
    • on a specified date,
    • at a specified price.

It is accepted that this condition is satisfied where the arrangement provides for the employee to settle the loan outright by selling the car to the lender at the agreed amount (which matches the amount of the outstanding loan). There will not necessarily be any movement of monies and this is the normal structure within ECOS arrangements.

  • The specified price is based on an estimate of the likely outstanding amount of the car loan on the date specified for A to sell the car back to P. This estimate is made at the time when the car ownership arrangement is made.
  • The car ownership arrangement is not a tax avoidance arrangement (see EIM45855).

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‘Car’ and ‘licensed lender’

‘Car’ means a mechanically propelled road vehicle which is not:

  • a vehicle of a construction primarily suited for the conveyance of goods or burden of any description,
  • a motor cycle within the meaning of Section 185(1) Road Traffic Act 1988, or
  • a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used.

A ‘licensed lender’ is a person who is:

  • a licensee under the Consumer Credit Act 1974 acting within the terms of the person’s licence, and
  • not acting as a trustee.

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The purchase condition

The purchase condition focuses on what A does. It is met if, as provided for by the car ownership arrangement, A purchases the car using the car loan.

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Other reliefs for ECOS

An ECOS will not necessarily meet the conditions for exclusion under Section 554O. But, just because an ECOS falls outside Section 554O, that does not necessarily mean that the Part 7A rules will impose a charge.

If the ECOS does not involve a ‘relevant third person’ (see EIM45035), it will not pass through the Section 554A gateway in the first place.

If the ECOS does pass through the Section 554A gateway, there will be no charge if it comes within Section 554G (exclusion for employee benefit packages). See EIM45225.