Cycle to work

Dawny

I wanted to check if the following scenario would fall under the cycle to work scheme.

Employer purchases bike for £500. Employee loans the bike over three months and during this time pays a third of £500 through salary sacrifice back to the employer. After the three month period the ownership of the bike transfers to the employee.

Information on Gov.co.uk seems to be based on the idea that the employee will loan the bike over a longer period.

Thanks for any help in advance!

MarieNoelle

I may have misunderstood the way the scheme works but I thought the amount paid by salary sacrifice is a hire payment rather than the repayment of the value of the bike.
The employee may be given the choice to purchase the bike at the end of the hire agreement but this would have to be set at a fair market value to avoid a BIK.

The following guidance may be helpful.

MN

Neillaw

This scheme usually stipulates that the payback period was 12 months. When I purchased mine I was looking to pay it back over 6 months but was forced to do it over the full 12 months.
The biggest issue with this scheme is the fair market value, for a short period like 3 months your not going to get much of a reduction in market value. Over a year however they would have produced a whole new range which makes last years bike obsolete or significantly reduced.

Gem7321

My understanding was that there should be no automatic right for the employee to take ownership of the bike otherwise it would be a hire purchase agreement and not a hire agreement.

Also, HMRC have produced a table showing the market values to be paid by the employee if ownership transfers to the employee at the end of the hire period here https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/63929/cycle-to-work-guidance-update.pdf

hong_bian

Not sure my understanding of the scheme is correct, but here it is:

Employer purchases the bike for £500, Claim the VAT of £83.33, the cost of hiring is £416.67. Employer obtains the ownership.

Employee pays hire cost through salary sacrificed scheme for £500 (the VAT of £83.33 shall be input VAT of the employer to go to HMRC) for a period of time (normally 12mths or over). (understood this from various resources, but nowhere has said that the scarified amount must be the invoiced amount)

At the end of hire period, the ownership of the bike belongs to the Employer. It is normal for Employer to give the option for Employee to purchase the bike (what if Employer changes the mind?)

Then Employee pays 25% of the bike if the bike has been one year old, that is £125VAT inclusive to Employer. (Not sure if Employer has to count the input VAT again? and this should be an one-off payment?), Then if the bike is over 18mths year old, then 21% of invoiced amount and so on.

So in total, Employee pays £500+£125 and gets the ownership of bike after a year. Since £500 has been paid through Salary Sacrificed scheme, Employee saves 32% on Tax and NIC, that is £500*32%=£160.

Therefore, if you want your bike through cycle to work scheme after a year, then typically, you save £35 in total on a bike cost £500 and wait for a year to claim the ownership.

If you don't follow the rule, the difference in between how much paid and the Fair Market Value matrix will be accounted as benefit in kind and you'll have to declare it on your own tax return.

This is what I understood and hope to be corrected.

Kind regards,
Hong

Gem7321

I haven't read your post in great detail but yes believe your understanding is correct but bear in mind where you have said input VAT do you mean output VAT? The employer can allow the employee continued use of the bicycle after the loan period has ended without transferring ownership and as long as the employee continues to meet the conditions for exemption no tax charges will arise and no further hire fees either.

The savings for the employer are very small if operated by salary sacrifice, employers NIC only as any savings on capital allowances are offset by the increase in profit through the salary sacrifice. Then if ownership is transferred part of the AIA will be clawed back through the disposal value.

To me it seems the scheme really isn't worth it unless you have a lot of employees who want to take it up.

hong_bian

Many thanks for the comment.

Yes, the input VAT of £83.33 is part of sacrificed salary and pass to HMRC as input VAT by Employer. Employer has claimed output VAT when the invoice was paid. This way HMRC doesn't lose anything, but a burden to an accounts person

I agree with MarieNoelle that the hire payment shouldn't be a repayment of bike, but unfortunately, HMRC said employee should pay whole cost to employer (net invoiced amount) and input VAT (to cancel the output VAT claimed by employer), total invoiced amount through salary sacrificed scheme. So if employee stays with the same employer for more than 6 years, then there's nothing extra to pay. If employee wants to claim the ownership or leave the employment, then extra has to be paid according to HMRC table.

I've paid back the total amount to the company after 12mth period, however, I'm reminded often by the boss that the bike is still the property of company, I regret a lot in taking this cycle to work scheme now.

payrollpro

I think this has been made more complex than it really needs to be. From the facts I see it is a lot simpler to work out. The employee has the use of the bike for three months and then acquires it, is that correct? If so the arrangement fails HMRCs first test, whether or not the sacrifice constitutes a realistic alteration to the employees terms and conditions of employment. HMRCs test is usually whether or not the variation to the contract is for at least 12 months. Assuming you can get over that hurdle, in this case two variations are needed, one to start and the other to stopafter three months. Then the bicycle transfers to the employee at its market value as laid down in the table, or from alternative evidence, in fact after three months HMRC would not accept any attempt to reduce the value so it transfers at £500 and anything less would be a reportable event on a P11D, transfer of asset. The VAT issue is not relevant though the usual rule is that if input tax is reclaimed on purchase output tax must be charged on its subsequent sale. If the company foregoes the input tax recovery then there is no requirement to charge output tax on its sale. In this case the test is how much the employee pays for the bike compared to the deemed value, either from the table or from alternative evidence.

hong_bian

My comments earlier to this topic was based on my understanding at the time through the contract between my employer and Cyclescheme. However,

1, Employer can buy a bike straight from a bicycle shop to participant in this scheme, no need to enter a contract with third party;

2, The amount of cost of hire agreement is decided between employer and employee (Told by HMRC this morning!). Some company are able to loan bikes to employee for free (loan agreement), and some small companies may want some money back from employee (hire agreement). Employee agrees to accept lower gross salary in exchange to obtain this benefit in kind - use of bike through Salary Sacrifice Scheme. This amount does not have to be the same as purchase price shown on the invoice!!

3, During the loan/hire agreement period, the use of bike is tax exempt benefit in kind that both the employer and employee don't need to report on P11D.

4, After loan/hire agreement period ends, the ownership of the bike belongs to company. [ But be aware! If you enter a contract on behalf of your employer with a third party, please read the contract carefully. You may have to sign an opting out form and claim the ownership back to company after 12mth period. Otherwise, your employee's bike will become third party's property and they have right to dispose the bike and keeps the proceeds.]

5, If you don't want the ownership, no more money to be paid, no P11D should be considered (Only if your employer has the ownership). But if you do, the employer can agree to dispose the asset and sell the bike to you according to fair market value matrix which is published on HMRC website. This value is calculated based on the gross value of the bike, employer will need to declare the Output VAT and pay to HMRC. The sale of bike becomes taxable benefit in kind for employee and has to be declared on P11D for both employer and employee. [If the ownership is transferred to third party, you may have to pay extra to take up ownership. You may not given option to take up ownership for free as you might be able to if the employer dispose the bike after 6 years]

HMRC is more concerned when ownership is transferred, P11D and P11D(b) will have to be submitted.

The above may correct some of my earlier comments and once again can't be taken as professional advice but personal experience.