The Cycle to Work scheme has been growing in popularity. However, have HMRC guidance plus a recent court ruling put a spanner in the spokes? Paul Bartlett investigates
The cycle industry is currently both an extremely fashionable and growing sector for a variety of different reasons.
A bike is the most versatile of machines, enabling people to get around more easily and efficiently than most other forms of transport.
There are many reasons why people are now opting to use a bike:
■ Heath and fitness - making cycling a part of the daily commute is a great way to keep fit.
■ Transport and the environment - with the majority of car journeys being under five miles, cycling is a great alternative and often a quicker way to get around town. Opting to use a bike is also a carbon free mode of transport both globally (CO2) and locally (Noise and Pollution).
■ Saving money - rising fuel costs are a great motivator in encouraging people to get on their bike.
Going green
To encourage people to cycle to work, the government created a little publicised tax break in 1999 to incentivise employers to make cycling part of their ‘Green Transport Plans'. As a consequence the scheme allows employees to acquire bikes tax-free, as long it is used for commuting. In 2005 this scheme was re-branded as Cycle to Work.
So how does it work? The employer loans the bike to the employee as a ‘tax free salary sacrifice' on the condition that the bike is used to get to and from work or alternatively for work-related journeys. The employee is then given the option to buy the bike at the end of the loan period for its fair market value at that time.
The Cycle to Work initiative is a good example of a government strategy helping to change our behaviour.
Employers loan their staff bikes as part of an overall employee benefits package, and in return receive a saving from their employer's national insurance contributions.
Employees take advantage of the tax exemption, making significant savings on the cost of obtaining a bike.
As a result:
■ It is estimated that over 400,000 people now participate in a Cycle to Work scheme.
■ There are considerable wider benefits, with over 2,000 bike retailers within the UK providing bikes and over 15,000 employers implementing their own schemes.
As a result many people have been given the impetus to change the way they commute; it is estimated that well over 50% of those using the scheme had not commuted to work using a bike previously.
However, two recent initiatives have challenged the success of the scheme by questioning the savings employees can make.
Approach to Fair Market Valuations at the end of the loan period
Historically the guidance from Her Majesty's Revenue and Customs (HMRC) made it very difficult for employers to assign a specific fair market value to their bikes at the end of the hire period (particularly as no formal second hand market for bikes exists). Large employers increasingly sought clarification from HMRC on how to approach this issue in a compliant way.
Therefore in August 2010, HMRC issued new guidance (EIM21667a) relating to treatment of bicycles at the end of their loan term.
Although the figures for residual values proffered by HMRC are in excess of the bike industries own valuations (see HMRC table right) and as a consequence the perception, by employers and employees, is that the cost of ownership has risen… the reality is different.
The broad impact of the guidance has been to clarify ‘when' or ‘how' to transfer ownership:
■ Employees are given the option to extend their initial hire agreement for a further 24 or 36 months (see the HMRC table right) for values of bikes at the extended ages.
■ Alternatively, employers can ‘gift' the bike to the employee; however, they also need to report the associated benefit in kind on each participant's P11D. The employee then pays the associated Income Tax (and not National Insurance) element for this benefit in kind. This solution is straightforward and significantly cheaper for employees; however, it does mean that there is some additional payroll administration required by the employer to ensure the P11D is suitably updated.
These options protect the savings for the participant, and hence the scheme's value for both the employee and employer.
In order to ascertain the original price of the bike, as it is normally acquired by employers at arms length from unconnected persons, either of the following methodologies can be used:
■ The amount that the employer paid or was invoiced for the cycle; or
■ The retail price of the cycle that was taken into account in working out any hire payments.
The recent clarification from HMRC on fair market values has helped employers to apply, with certainty, a final residual value. This certainty has allowed employers to adopt an approach which protects employees from losing the associated savings.
VAT
Recently the European Court of Justice (ECJ)ruled against Astra Zeneca (AZ) with regard to reclaiming VAT on retail vouchers.
The ECJ ruled that employers must pay VAT on retail vouchers provided through salary sacrifice arrangements. Essentially Astra Zeneca reclaimed the input VAT on the purchase, but did not account for the output tax on the value of vouchers provided to its staff.
Astra Zeneca argued that the cost of acquiring the vouchers was a business overhead, and it ought to be entitled to deduct VAT resulting from that purchase, and not charge output tax on the provision to employees (on the basis that they were not provided for ‘consideration' - such as the salary sacrifice does not amount to consideration).
Many employers have questioned whether this ruling applies to the provision of bicycles via a salary sacrifice arrangement.
The position for Cycle to Work is clear and very different:
■ Under a Cycle to Work scheme the employer owns the bicycle as a business asset as opposed to a voucher. The ‘voucher' element is merely a mechanism to facilitate the collection of the bicycle.
The bicycle is provided for business reasons and therefore no charge to VAT arises under Article 3 of the Supply of Services Order 1993.
Ownership of the bicycle remains with the employer and does not pass to the employee and the employee has no right to dispose of the bicycle.
■ When the bicycle is offered for sale to the employee, VAT is charged on the transaction.
■ The Department for Transport have issued guidance notes to support Cycle to Work and these clearly state that VAT should be recovered by the employer.
However, if HMRC at a later stage consider the ECJ ruling applies to Cycle to Work arrangements, the incentive for employees to take part would cause further erosion to the scheme.
The success of the scheme has been driven by the savings it offers to users.
It is conceivable that this year, with the ECJ's ruling and changes to the approach for the fair market value, employees could see a reduction in possible savings from 35.4% to 6%, undermining the basis for the scheme.
Savings?
To encourage people to cycle to work, the government must make it affordable. Undermining or eroding the current level of savings risks removing its main driver for growth and thus hampering the government's own objectives for a sustainable transport strategy, carbon reduction and promotion of public health.
In these times of austerity, the scheme has had a minimal overall cost to the Exchequer, however, it has been a massive incentive to people to move from the ‘car' to ‘pedal power'.
The Cycle to Work industry is fully supportive of HMRC's new fair market valuation table and hopes this will stabilise and legitimise the approach that many employers will use at the end of the loan period.
Further, through the existing savings offered by Cycle to Work schemes, more and more people are being encouraged to see a bike as a rational alternative for their commute to work, however there is still scope for further encouragement and to continue or even accelerate the trend to two wheels.
Paul Bartlett is head of rewards and benefits at employee benefits consultants Grass Roots
