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

by Simon_MacMichael   August 13, 2010  

London Cyclist.JPG

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.
 

23 user comments

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Whilst I'd rather pay 5% and pay the tax on the difference between that amount and what HMRC say is the residual value I think most employers will just set the transfer fee at £250 for a £1000 bike in order to avoid giving scheme member staff a preferential 'benefit in kind' that they can't give to everyone they employ.

In organisations where staff get no VAT relief it will make the scheme economics marginal as you won't really be making a huge saving on list price of the bike. People may just come to regard it as a useful 0% loan though (I would)

Really, though?

posted by workhard [389 posts]
13th August 2010 - 17:28

5 Likes

The scheme has been badly drafted from the outset, and has only been so successful because the rules have been bent by employers implementing it. In particular there can be no agreement at the outset for the employee to buy the bicycle after one year, and this has cleary been generally ignored. Furthermore, if the bike is sold to the employee it should be at market value plus VAT. Even the new guidance of 25% value after one year is pretty low - there are very few one year old £1000 bikes that I wouldn't give £250 for and consider myself in receipt of a bargain. Finally, I am not an accountant, but when we looked at the scheme for our work we decided that it was pointless if you stuck to the rules, and otherwise the company would be committing a tax fraud/dodge. I believe that many of the organisations implementing this scheme, particularly in local and national government, have shown at best a disturbing lack of competence at understanding some basic principles. What confidence does this give me in the rest of their activities, which are often much more complex than this simple scheme?

posted by Geoffroid [17 posts]
14th August 2010 - 6:40

3 Likes

Sorry Geoffroid but your assessment of "there are very few one year old £1000 bikes that I wouldn't give £250 for and consider myself in receipt of a bargain" shows you didn't understand the scheme completely

The employee does not receive the bike for that sum - the case is that he/she makes 11 monthly payments of 1/12 th of original purchase price, tax free, during the course of the year (in a 12 month hire example) and then is required to pay a residual of £250 on top of that.

For a £1000 bike my very poor maths makes that

Monthly Payment = £83.33 Gross
Less 40% Tax = £50
Times 11 Months = £550
Plus £250 Residual = £800

Still saving £200 on list price - but not quite such a bargain now, eh?

And Workhard - to your point, yeah it's a useful loan scheme - but I'd rather they just worked out that total payment upfront and split it evenly over the period - that back-loaded stinger of a payment is gonna hurt!

Buddha said:

Believe nothing, No matter where you read it,
Or who has said it, Not even if I have said it,
Unless it agrees with your own reason
And your own common sense.

mad_scot_rider's picture

posted by mad_scot_rider [566 posts]
14th August 2010 - 9:22

3 Likes

Actually, the scheme guidance notes from the HMRC state that the employer may choose to give the employee the option to purchase the equipment after the loan period is over,and "typically this would be offered at substantially less than the original value of the equipment, but to prevent a taxable benefit in kind arising as a result of the transfer of ownership the employee must pay the employer the full market value of the equipment." There are also other issues regarding the charging of VAT on the sale to the employee, and capital allowances for the employer. My point is that £250 for a one year old £1000 bike is at the low end of market value for most bikes, and still makes the scheme of little value. Along with other issues, it is clear that the scheme was very badly drafted in the first place.

posted by Geoffroid [17 posts]
14th August 2010 - 10:08

7 Likes

Thinking Hmmmm! I got a bike - a Specialized Rockhopper Expert, on the scheme through work (I work in the public sector). The scheme is administered for us by Cyclescheme, and I have had the 'final offer' to buy the bike sent through by e-mail. My bike costs £850, and initially I was told that it would be 'fair market value' - which would be about 5%.
The settlement fee is £54. I don't think that is 5% or anywhere near. It does, however, make me wonder if there is money being made by somebody somewhere! Interestingly, Cyclescheme last financial year had seen its 'profits' rise to £4 million, taking it into the Times list as one of the fastest growing companies that year?

stokeybloke

posted by stokeybloke [32 posts]
14th August 2010 - 10:26

6 Likes

mad_scott, i think youve misread the final term deffenition. You pay 12 not 11 monthly installments to cover the loan of the bike, once this is complete you have the option to give the bike back, arrange with the company to continue the loan (at no cost) or purchase the bike, and the final 25% purchase payment is EXTRA not a replacement for the 12th payment.

So using your figures youd only be saving 15%

STATO's picture

posted by STATO [423 posts]
16th August 2010 - 10:15

5 Likes

I recently considered buying a new bike via Cyclescheme. When everything was taken into account (including the 11% admin fee that Cyclescheme were intent on adding, the charge they were going to make to the retailer, and the limited tax benefits I could achieve as an NHS employee), I found that I could negotiate as good a deal direct with my local bike shop, with a few goodies thrown in. This also eliminated any concerns about my employer deciding the "will-they-won't-they" final purchase price, which is completely unknown at the time that you enter the scheme.

Grimpeur

posted by Grimpeur [7 posts]
16th August 2010 - 10:15

5 Likes

When I bought my bike through the scheme I was only able to get £900 for the £1000 voucher, as the operator of the scheme only gave the bike shop that value when they presented the voucher (90% of the voucher value). I was fine with that, and it does explain why profits are good at the cyclescheme companies! Also explains why bikes you'd expect to be listed as c£900 are actually on retail for £1000.

Note that I was happy with the 'deduction', as I reckoned I was still doing okay; given the overall financing of the bike (low residual value from employer (5%+VAT), etc.) and the price of the bike being very competitive (got a nice wheel upgrade for free.)

Anyone joining my employers scheme now get a more complex residual value calculator based on whether it's been used offroad, etc. Conditions are classified A (pristine) - D (knackered). Rules are still being determined.....

As I joined before the rule change, I'm okay - however as I clean my road bike after almost every ride, it's in great nick; and therefore I might not do the scheme again given the higher residual value placed my bikes.

Bring me sunshine, and dry roads

MalcolmBinns's picture

posted by MalcolmBinns [107 posts]
16th August 2010 - 11:11

5 Likes

i suspect my employer will just charge the 25% to save the hassle of the extra calculations.

according to my payslip i have 25% tax + NI deductions so a 1000 bike will end up costing 883 pounds.

1000 pound bike - 17.5% vat = 851
851 - 25% NI & income tax = 633
663 + 250 = 883.

so i save 11%.

To me its no longer worth it given the restrictions i had in purchasing and the length of time it took to get the bike. I could get a bigger discount in a sale, or 10% simply using the LCC/CTC memebership.

posted by ribena [147 posts]
17th August 2010 - 10:56

3 Likes

I suspect I'm missing something here. But surely the company does not have to have the value of the hire contract to be the value of the bike. It could be enough to cover the loss in value of the bike over the hire period. I.e. company buys a bike expecting it to lose 75% of its value over a year. Hires it to an employee via salary sacrifice then may offer it for sale or possibly further hire.

1000 pound bike. (851 ex VAT)
expected loss in value = 75% of 851 = 638
Hire agreement over 12 months = 638/12 = 53 Gross
Remove 25% NI & Tax ~ £40 per month

Cost to employee 40*12 + residual value 213 = 693
Saving of 31% or thereabouts.

Tax man happy, employee happy.

Write in a clause about employee pays extra if bike fails to be sold for expected value (which also covers stolen/broken bikes) and company accountant is happy.

posted by 0liver [76 posts]
17th August 2010 - 12:18

4 Likes

Can you claim back the running costs as part of the lease agreement?

I rode my Rockhopper cross country to work every day rain, shine and snow. It a great bike but by the time you have got through tyres, tubes, sprockets, chains, spokes, and servicing it soon adds up.

I lease mine for 18 months what is the residual value then?

posted by johnp [2 posts]
17th August 2010 - 14:55

4 Likes

I bought my bike last year and therefore am not due for the balloon payment until later this year. Will the changes in the tax apply to an agreement already underway? and on a £700 loan (bike plus gear) will it really make that much difference which tax rule it comes under? Thinking

Rode the E'Tape Caledonia - first sportiv ever and thoroughly enjoyed it

badbunny's picture

posted by badbunny [71 posts]
18th August 2010 - 8:01

4 Likes

Cycle to work is dead.
There is only a small number of people for whom the scheme makes any sense now. They have to be higher rate tax payers, work for a company who has decided to pass on the VAT saving, and who administers the scheme themselves.
For pretty much anyone else it becomes more expensive to buy a bike through the scheme unless you tie yourself in to a very long hire period.
The most annoying thing is that as far as I can see, this "clarification" will apply to all current scheme members, who entered into the scheme thinking that the charge at the end of the year to take ownership would be of the order of 5%. We have several people at work who redeemed their bike vouchers only last week! Angry

posted by AleT [53 posts]
18th August 2010 - 9:08

5 Likes

jonp - no, running cost are covered by you in the lease agreement

badbunny - yes it applies to you, how much difference it make depends on your employer, tho its only bike cost that applies i think, so 25% of £700 instead of whatever your employer told you it might be.

STATO's picture

posted by STATO [423 posts]
18th August 2010 - 9:50

7 Likes

The one bright light from working for a living is being extinguished. Crying.

Anyway running an expensive bike has been significantly cheaper than my £200 bike.

Also I can throw myself off the nearest steep hill and not hurt myself. Satisfying on the way home.

Might renegotiate my payments though, at the moment I will have paid for the bike in full and then have to pay £250.

posted by johnp [2 posts]
18th August 2010 - 10:07

6 Likes

Hello from a newish lurker…

I was (am?) going to buy a Cannondale CAADX5 105 for £999 under the cycle-to-work scheme. I work part time for the council and have just gone through the steps to get my voucher, but stopped (paused?) when I saw what the payments were.

Does this sound right to you old hands?

12 monthly deductions of £70.85 i.e. £850.20, then presumably I'd have to pay something at the end of a year to own the bike outright.

Now I'm not saying a £150 saving is loose change, but I've got enough money to buy the bike for cash and lots of shops do interest free credit, and 20% off sales aren't unknown (OK it's a new model, so might stay at full price for a while) and I'm sure if you went in with used bank notes, a lot of shops would give you some accessories.

So am I missing something? Advice, comments or brickbats all welcome.

posted by dtd [56 posts]
26th November 2010 - 19:33

8 Likes

depends on who's running the scheme and how it's financed, but i'd expect better savings than that in the salary sacrifice bit of the scheme. anything from 25% to 50% is more normal. That being said, if the circumstances are against you – for example, your council is opted out of SERPS, not passing on VAT savings and using finance to run the scheme – it's not impossible for the saving to be that low. in those circumstances you're better off just getting a bike on 0% finance from your local shop. Once the scheme is over you'll have to pay at least another £70 to make the bike yours based on current HMRC advice.

Dave Atkinson's picture

posted by Dave Atkinson [7497 posts]
26th November 2010 - 22:31

5 Likes

Sorry to dredge this up again but we've just had our letters requesting final payment.

My bike appears to be going to cost me motre thanthe ticket price in the shop.

12 x £67.38 = £808.56
+ our final payment demand of £285 is a total of £1093.56

Given that my bike was only £950 (I may have had a voucher for the full £1000 I can't recall) there is a difference of at least £93.56 and at worst £143.56

According to the Evans Ride to Work website the company can transfer ownership to me, at which point I become liable for the tax on the amount shown in the transfer of
ownership table. That figure could be as low as £69.70 if I delay the transfer for another year.

Anyone have a clue where I stand, before I go off on a rant to our franky hopeless HR dept.

posted by JohnBuc [57 posts]
31st January 2011 - 11:53

5 Likes

who's running your scheme?

Dave Atkinson's picture

posted by Dave Atkinson [7497 posts]
31st January 2011 - 12:21

6 Likes

It's Evans' scheme through work.

posted by JohnBuc [57 posts]
31st January 2011 - 12:59

3 Likes

Having just had the pleasure of our HR dept trying to explain it to me...

They claim to have saved us money by claimin the vat back, plus the saving through salary sacrifice and yet I have still paid out more than the bike cost.

They don't want to go down the Benefit in Kind route as "it may mess up your tax code"

Seriously WTF is going on??

Needless to say a trip to accounts is next on the adgenda to try and get some answers.

HR said "well we calculate you should just about break even or pay slightly more.."

Not Happy!

posted by JohnBuc [57 posts]
1st February 2011 - 12:12

4 Likes

Don't forget that the payments are made out of gross salary - so you dont pay tax on the payments before you make them. For a £100 per month payment on the scheme, you'd only have received £60 for a higher rate tax payer, or £80 for a standard rate tax payer.

The changes definitely make the scheme less cost effective, but it still saves money for a lot of people if they are higher rate taxpayers or if their company gives them the VAT saving.

posted by step-hent [702 posts]
1st February 2011 - 12:56

4 Likes

Agreed, but surely, and I do stand to be corrected, if I have paid £1150 for a bike with a ticket price of £950 then something is very wrong.

I know that the £67 or so pounds a month I have paid out would be worth less after tax but surely the saving you make should be against the value of the product you buy.

The scheme didn't say if you spend £100 we will give you £99 back but take the payment from pre tax and therefore lower your tax burden, or did it?

posted by JohnBuc [57 posts]
1st February 2011 - 14:02

3 Likes