HMRC Draft Legislation: The Conclusion for ECOS?
Steve Freeman · Posted on: July 22nd 2025 · read
Following the Autumn Statement, the Government have finally confirmed the new rules for “contrived” ECO style schemes, with proposed changes set to come into effect from October 2026.
The legislation introduces a new section, 116A of ITEPA 2003, which can be accessed here: Draft legislation on ECOS.
A Thorough Clampdown
The draft legislation is comprehensive and there are no transitional provisions; any car “caught” from October 2026 will be taxed as a company car. If it’s a petrol or diesel (and that’s very likely) the tax charge could be significant.
The Chancellor’s original statement indicated an April 2026 as a start date so there is some very temporary relief, but we also hoped there would be some transitional provisions. The implication is all existing schemes need to have closed by October 2026 or face potentially very high company car tax rates. This may mean that any cars still under contract in October 2026 will need to be bought back.
116A(2) of the draft legislation includes scenarios where company car tax will apply. However, it's subsection 2(d) that stands out. This allows Treasury to add new categories by way of Regulation, in effect a catch all for anything not caught by a, b and c.
While some may consider structuring arrangements to evade the narrower definitions in 2(a)-(c), subsection 2(d) appears to be specifically crafted to capture any attempts to bypass the rules, granting Treasury the right to add new categories to challenge future schemes they perceive as inconsistent with the legislation's intent.
Although the legislation is presently in draft form and open to consultation, we at MHA would be surprised if there were any significant alterations. The trajectory is evident, and businesses should begin their planning accordingly.
What Does This Imply for Employers?
For employers who have widely embraced ECOS, the implications could be substantial. From October 2026, ECOS arrangements are unlikely to provide a viable or compliant alternative for supplying vehicles to employees.
A forward-thinking solution is the Electric Vehicle (EV) Salary Sacrifice scheme. To assist employers with this transition, MHA has partnered with HRUX to offer a modern, technology-driven scheme that significantly alleviates the administrative burden and ensures smooth implementation. Unlike many generic providers, this solution is crafted and managed by employment tax experts, providing tailored, ongoing support on all aspects of the scheme—from tax and compliance to employee engagement.
Simultaneously, developments in the broader EV market are enhancing the practicality of these schemes. The introduction of the Zero Emission Vehicle (ZEV) mandate is steadily augmenting the availability of EVs in the UK market, and this trend is anticipated to persist in the coming years.
"While there are currently no intentions to restrict salary sacrifice arrangements for company cars, it is important to note recent government initiatives. For instance, the consultation regarding salary sacrifices for pensions and the introduction of a new EV grant aimed at retail customers. The latter may boost retail demand and lessen the perceived burden on the fleet sector to support EV sales, potentially reducing HMRC's reliance on salary sacrifice schemes to help OEMs meet ZEV mandate targets. "
These are significant indicators that employers should remain vigilant and proactive in their planning.
Need Assistance?
If you are a car dealership, manufacturer, or employer currently operating ECOS arrangements, now is the time to reassess your vehicle benefit strategy. MHA, in collaboration with HRUX, offers a top-tier EV Salary Sacrifice solution that is efficient, compliant, and aligned with the industry's future.
To discuss how these changes could impact your business and how we can assist with your transition, please reach out to our team.
