Cycle to Work scheme payments to be VATable from next year

HMRC have announced that from 1 January 2012, VAT will be applicable on any payments made under the Cycle to Work scheme. This ruling is in response to a recent European Court of Justice judgement, and HMRC has confirmed that provision of a benefit via salary sacrifice to employees constitutes a supply of services for consideration and is therefore subject to VAT.

Got that? It's all a bit dry, this, but it's worth working through it to see what it'll mean if you're planning to get a bike from Cyclescheme, Halfords, Evans or one of the many other Cycle to Work providers.

As we understand it, the European Court of Justice judgement is essentially saying that since you'd pay VAT to hire a bike from a bike hire outlet, and you're effectively hiring the bike from your employer when you get a bike through a Cycle to Work scheme, VAT is applicable to that too. The employer has to 'account for the VAT', which means that they can pay it if they want rather than pass it on to you. But let's be realistic: that's not going to happen, is it?

So that's 20% of your saving out of the window? Well, no. Things never seem to be simple with Cycle to Work in the UK and this ruling, although it clarifies some things, is no exception. The VAT is applicable to the whole payment before tax and NI reductions, which means that the actual reduction in your saving is closer to 11%, according to David Sawday of Halfords, who spoke to us about the ruling and has done the sums that we're not clever enough to. "It's as much good news as it is bad", he told us. "The worst thing about the scheme is the uncertainty; we saw the effect on the scheme of the uncertainty over market value payments last year. This ruling allows us to ensure that we're running a compliant scheme for everyone".

The other good news is that if you work for an institution that hasn't been able to reclaim the VAT on bikes in the past – NHS trusts, for example, and some Government departments – our understanding is that the ruling will create a system by which the VAT can be reclaimed, so the employee will be able to have the bike at the ex-VAT price and pay the VAT on the monthly payments. So that'll mean they'll actually save more money, not less. The new ruling comes in to force on 1 January, so if you're planning to get a bike before that you won't be affected at all.

We like the Cycle to Work scheme, but this all makes our heads hurt a bit. We spend most of our days wondering why the scheme can't be like the Italian EcoIncentive one, where the Government just fronts a big pile of cash, and you get some if you buy a new bike, and when it's gone it's gone. But that would be much too simple...