Fears over Cycle to Work tax changes played down
HMRC says fair value is up to 25% of bike's original cost - but industry says impact will be less
Initial fears that new tax rules introduced this week might mean the end of the Cycle to Work Scheme have been played down by industry insiders.
The new rules put in place by Her Majesty’s Customs & Revenue (HMRC) for bikes bought under the scheme will see the final sum payable by employees to take ownership rise to as much as 25% of the bicycle’s original cost.
However, immediate reaction within the industry suggests that the impact of the changes will not actually be as dramatic as that headline percentage suggests.
Having spent a good chunk of the afternoon reading through the HMRC rules closely ourselves, we agree that there’s no need to panic, though we have to admit that we’ll probably need to lie down in a darkened room now for a while to get over the brainfreeze.
Ever since the Cycle to Work scheme was introduced in the Finance Act 1999 as part of the Labour Government’s Green Transport Plan, there has been an uneasy, and somewhat conflicting relationship what the scheme is meant to do – give an incentive to people to ride bikes to improve the environment and their health – and HMRC’s seemingly single-minded determination to ensure that no-one using the scheme is obtaining a tax benefit from it.
In practice, the scheme allows employees to lease bikes through their employers through a salary sacrifice scheme which has the effect of reducing their taxable salary, and with the employer claiming back VAT, results in a saving generally reckoned to be around 50% on the usual retail price if the employee buys the bike at the end of the specified term for a nominal sum.
While the common perception from the employee’s – and often the employer’s – point of view is that the scheme is a way for staff to buy a bike tax-free, and certainly any cyclist getting to use a bicycle under it will consider it as “their” bike, the reality is that the bike is bought by the employer and effectively leased to the employee for a specified period.
To comply with the rules, the agreement needs to be drawn up as a contract for hire, as distinct from hire purchase, but typically, at the end of the hire period, employees are given an option to purchase the bike for a nominal sum – 5% seems to be the standard – but HMRC has now amended its “fair value guidance,” in a move that appears to be widely regarded within the industry as making it much less attractive for employees to use the scheme.
Under the new rules, the recommended fair value varies, depending on whether the bicycle originally cost above or below £500, and the length of the hire contract.
HMRC now says a £500 bike leased for a year has a fair value of 25% at the end of that period, while that of a £499 bike leased for two years is just over half that, at 13%. You can find the full permutations on what is termed the ‘transfer of ownership matrix’ here, and while a £500+ bike is said to have a fair value of just 7% after four years, that’s still above the 5% typically paid until now, irrespective of period. Moreover, few employees looking to effectively buy a bike through the scheme are going to want to commit to that length of hire agreement.
The Cycle to Work Alliance, launched at a Houses of Parliament reception by Chris Boardman in July to highlight the Cycle to Work scheme’s benefits, said in a press release that while it welcomed and supported HMRC’s transfer of ownership matrix since it made it easier to administer the scheme, it believed that it could also “erode the scheme” by making it “too expensive to purchase the bike after the hire period.”
A spokesperson for the Alliance, whose members comprise retailers Halfords and Evans Cycles, both of which operate their own programmes facilitating access to the scheme, as well as Cyclescheme, which works directly with employers to make the initiative available to staff, said: “The cycle to work scheme demands ongoing support and should not be eroded, it is the glue that helps Government deliver its policies. The Department of Transport and HMRC must work in unison to make the scheme economically attractive to participants”.
The trade website BikeBiz, which has covered the HMRC changes in depth in an article that addresses the issue from much more of a trade perspective than we do here, says that the Cycle to Work scheme makes up 25% of turnover for “many” bike shops, and as much as 75% in extreme cases.
While the 25% figure is the one that will doubtless grab the headlines, one bike shop that BikeBiz spoke said that one interpretation of the rules could be that in the case of a £1,000 bike, the employee could pay a nominal £5 to purchase it from their employer and pay tax and National Insurance of £79 on the resulting £245 on the resulting benefit in kind, equivalent to a final payment of £84, around one third of the £250 fair value.
National cyclists’ organsiation CTC also told BikeBiz that the impact of the new rules, might not be as great as that 25% fair value figure might suggest at first glance. A bike subject to that fair value assessment – one costing between £500 and £1,000, in other words, and bought by the employee after 12 months – would end up being purchased by the employee at 43% of its original cost compared to 51% previously, assuming the employer in both cases had passed on its own savings in not having to pay Employee NI contributions.
As a footnote, the rules only address bikes with an initial cost of up to £1,000, and while that is commonly perceived as the maximum value of a bike that can be leased under the scheme is £1,000, that isn’t in fact true – the value is unlimited, but if it exceeds £1,000, the employer must have a consumer credit license, something that few outside the finance industry are likely to want to apply for.
Below that amount, they are covered by a group consumer credit license, and it’s no coincidence that many bikes we’ve seen over the past few years, particularly ones that reflect an upgrade from an entry-level model ideal for someone who has been bitten by the cycling bug and wants to move on from their first bike, come in at just under the £1,000 threshold.