“Look out for a brand new bike in your pay packet.”
That is the headline on a leaflet for the Government’s Cycle to Work scheme, writes Carlton Reid.
Cycle to Work is a tax incentive aimed at encouraging employees to, er, cycle to work, thereby reducing air pollution and improving their health.
The scheme allows employees to benefit from a long term loan of bikes and commuting equipment such as lights, locks and panniers completely tax free.
Employers benefit from fitter, more punctual, more wide-awake staff. Employees benefit from better health and better bikes because their money goes further. There are more bike commuting positives in this free and online 98-page Bike to Work Book. With a budget of, say £400, an employee in the high tax-band can, in theory, afford a bike, plus accessories, worth nearly £800.
The typical saving for an average tax-payer can be between 38-45 per cent, although a ‘fair market valuation’ rule brought in by Her Majesty’s Customs and Revenue in August 2010 could impact on these savings,. There are online calculators to help you see how much you may be able to save. This one is from Cyclescheme. Type in your salary, the cost of your new bike and the cost of accessories such as a helmet, lock, panniers and so forth.
Worries about climate change, a planned lack of parking spaces at hospitals and new-build company HQs and other ‘sticks’ is making major employers take a long hard look at the ‘carrots’ on offer when formulating ‘Green Transport Plans’.
Car-sharing is one option, but cycling to work is another.
And to encourage cycling to work, the government created a little publicised incentive in 1999 to encourage employers to help their employees acquire tax-free bikes. In 2005 this scheme was re-branded as Cycle to Work.
Employers can loan bicycles to their staff as a tax-free benefit on the condition that the bicycles are mainly used to get to and from work or for work-related purposes. The employee ‘buys’ the bike at the end of the load period for a nominal sum.
It’s possible for any employer to set up their own Cycle to Work scheme.
However, creating such salary sacrifice schemes requires a working knowledge of employment law and the intricacies of the tax system. The paperwork is tricky to complete and there are pitfalls for the unwary such as falling foul of minimum wage requirements, credit licences and the redrafting of employee contracts.
Each employer will have different challenges which is why salary sacrifice scheme implementation is often out-sourced to third-party companies.
Cycle to Work used to have a tax-break parallel in the PC trade. The Home Computer Initiative (HCI) was a salary sacrifice scheme for getting an employer’s staff hooked up with PCs for home use. It used the same VAT and NIC rules as the bike scheme and was once a booming sector. Major players such as BT, Comet and PC World operated HCI schemes, as did Booost which entered the bike market via Halfords in 2004. The HCI scheme was discontinued in March 2006 but some HCI players turned to investing in Cycle to Work schemes, see The Facilitators, below.
NUTS & BOLTS
According to the official Department for Transport info, the Cycle to Work scheme works thus:
* Your employer signs up for the scheme * You then choose a bike from an approved supplier * The bike is then bought by your employer who reclaims the VAT * You then take delivery of the bike for your exclusive use – provided you use it for qualifying journeys, i.e. commuting to work * The VAT free price is then deducted from your salary by equal instalments over a period of time (typically 18 months), but as you don’t pay tax or NI on the income you forego, this will give you further savings. * After the period of salary sacrifice, the employer may give you the option to purchase the bike at a ‘fair market valuation’, though depends on the period you have had the cycle loaned to you.
This ‘fair market value’ (FMV) was formerly five percent of the original package price. So, after a 12 or 18 month ‘loan’ for a bike package costing £1000, the employee took full ownership for just fifty quid. However, a HMRC rule created in August 2010, states that for bikes of £500+ the FMV is set at 25 percent after one year, regardless of the ‘secondhand’ condition of the bike.
The actual discount available to an employee will be based upon their own personal tax circumstances (higher tax payers get fatter discounts) and whether their employer can recover all VAT. Some public sector employers (such as the military), charities and some others may not be able to recover all the VAT.
The discount also varies depending whether cash purchase or lease finance is used.
In rare cases, where employers decide to directly bear all scheme costs themselves, employees need no budgets at all, with the full cost of their loan bikes then legally treated as ‘non cash tax free benefits’. However, although it is at their discretion, most employers do not actually incur the costs themselves. They achieve this by taking advantage of parallel salary sacrifice tax legislation, allowing them to recover all costs from their employees over a period of time, while their employees still substantially benefit from Income Tax and National Insurance reduction in line with salary sacrifice, plus input VAT recovery where possible.
FAIR MARKET VALUE (FMV)
A Cycle to Work bicycle is ‘hired’ to the employee and hence does not fall into a benefit category. If the right to purchase the actual bike hired by an individual employee is guaranteed then this would change to a benefit in kind and exit the salary sacrifice offering. Cyclescheme, one of the Cycle to Work facilitators, believes that the fair market values offered for a second hand bike, used for a year to cycle to work, would be ‘scrap value’ and 5 percent of the original voucher value (i.e. bicycle and safety equipment which normally amounts to 15 percent of the package). Bicycle shops are not generally interested in selling second-hand bikes as they will need to give a warranty on something that has no service or use record. They will offer less than half of the shop retail value which would be the price that the employee would get via eBay or local papers, notice boards and so on.
Here’s an example of how Cycle to Work helped ‘John’:
1. Under his employer’s scheme, John chooses to have the loan of a bike retailing at £450
2. His employer reclaims the VAT – reducing the cost to £383 3. This net amount is met by John agreeing to a salary sacrifice whereby his gross pay is reduced by £21.28 per month over 18 months 4. The monthly net cost to John will be £14.26 because he doesn’tpay tax or national insurance on the gross pay (£21.28) that he has sacrificed 5. At the end of the 18 month period John’s employer offers the ex-loan bike for sale at a fair market value (FMV) e.g. £50 (To establish the fair market values, employers are sometimes asked to obtain quotes from local bike shops as the value of the bike will partly depend on the level of use, although in August 2010 HMRC ruled that the condition of the bike is NOT a factor to be taken into consideration, and that one year old £500+bicycles have a FMV of 25 percent, not 5 percent) 6. The cost to John is:
- Net salary given up £14.26 x 18 months = £256.68
- Cost to buy the bike at end of the period = £50 (under the old rules, but not the new ones)
- Total cost to John (68% of retail price) = £306.68
BIKE OR JUST BITS?
Many existing cyclists ask whether they can use the Cycle to Work scheme to buy just accessories, as they already have the bike.
In theory, this is allowed – the fine print says “bicycles and/or safety equipment” but as most schemes are now run by third-party facilitators it’s usually their rules you have to play by.
Many facilitators say they have a £200 minimum (and some have a £1000 maximum), and this is to discourage a cyclist asking to buy just a helmet and a lock under the scheme (although this can easily come to £200 for quality items). However there will be some people who want a frame or wheels or some other integral part of the bike like a groupset which means there will be potential tax problems with ‘dual ownership’ where the employer owns the new bits and the employee owns the rest. (This is also why ‘topping up’ – where an employee adds his/her own cash to by a bike and bits in excess of £1000 – is problematic).
There are a number of Cycle to Work third-party facilitator schemes. Click on a company name to go to the website.
Evans, Halfords and Cyclescheme are members of the Cycle to Work Alliance, which pays for a lobbying group to work on its behalf.
Some companies wishing to use the Cycle To Work scheme have been advised that employee contracts of employment would have to be rewritten to accommodate the scheme. Some of the third-party C2W facilitators can issue employee hire agreements that temporarily amends employee terms and conditions of pay. Check that this document and the terms and conditions of hire that accompany it are written in strict accordance with the OFT, HMRC and DfT.
The Office of Fair Trading has issued a group consumer credit licence to cover employers implementing Cycle to Work schemes. The ceiling via these licences is £1000. Download info from here. If companies already have a Consumer Credit Licence there is no £1000 ceiling for bikes bought on the Cycle to Work scheme. Electric bikes which cost more than £1000 cannot be bought via the majority of third-party facilitator Cycle to Work schemes, which is why electric bike companies are lobbying to raise the £1000 ceiling. It’s Bikehub’s understanding that there is little chance of such a raise.
WHO OWNS THE BIKE?
Bikes bought via the C2W scheme are owned by the companies concerned, until the end of the C2W agreement. This has concerned some major employers, fearing legal ramifications of faulty bikes and injured employees and so forth.
Most of the third-party facilitators have contract small print that stipulates that the bike shops selling the bikes are responsible for warranties and claims as per usual. Since the employer owns the bike they will pass on any claim to the bike shop who will pass it on to their supplier who will pass it on to the manufacturer.
For employees on short-term contracts – even rolling ones, such as doctors – it can be difficult to implement a Cycle to Work scheme, although not impossible. It’s also worth noting that if you’re made redundant or otherwise leave the company with which you started the salary sacrifice scheme, you’ll need to replay the outstanding amount with your final pay cheque.
LIABILITY ISSUES FOR EMPLOYERS
Some employers are concerned they could be liable for an employee cycling to and from work because the bike belongs to the company, not the employee.
Richard Grigsby from Cyclescheme said:
“One way to get around this thorny topic is to lease the bikes from a finance house who then own the bikes throughout the hire period.”
The Cyclescheme hire agreement requires the employee to sign that they will maintain the bike in a safe and roadworthy condition during the hire period. They also sign to say that they will insure the bike themselves.
Sarah Gow from cycle insurance provider Cycleguard/JLT Online said:
“I have taken advice in respect of the legal position employers may find themselves in if an employee is found negligent whilst using a bike to and from work. Whilst there is no legal precedent and case law which we can use to qualify this answer, we feel that it would be unlikely that the employer would be found negligent for the actions of the employee to and from work. If the employee caused an accident, it is out of the control of the employer who is not responsible for how the employee rides the bike. Equally if the bike failed as a result of a defect that would be more likely a product liability claim. However, each incident is judged on its merits and it is impossible to say with 100% certainty that no liability applies.
“We feel that this issue is adequately covered by the Employers Liability cover, which doesn’t usually have an exclusion for manually propelled vehicles, so even if an unusual set of circumstances did arise it would more than likely be covered on a standard EL policy.
“However, the issue of using a bike for work purposes is a little more problematic and if an employer gave instructions for an employee to use his/her bike in this capacity, it may be likely a claim could be brought against the employer, again dependent on the circumstances. This event would usually be covered under an employers standard EL cover.”
Employees of charities, universities, the armed forces and many parts of the NHS are usually denied a VAT saving.
Plus, if you don’t have a PAYE salary, you can’t take part in a Cycle To Work salary sacrifice scheme. The only bike saving for a self-employed person would be to buy a bike via the business and reclaim the VAT, if VAT registered that is.
SPREAD THE WORD
If your organisation is running the Cycle to Work scheme already, or thinking of starting, download and print the PDF leaflets created by Cycling England. There’s a version for employers and one for employees.
CYCLE TO WORK GUARANTEE
In October 2009, the Departments of Health, Transport and Culture jointly launched a major employer promotion for the Cycle to Work scheme.
More than 70 major public and private sector employers – including many NHS trusts – pledged to implement a new ‘Cycle to Work Scheme Guarantee’ in a bid to transform the numbers of people cycling to work.
Communities and Local Government
Department for Business Innovation & Skills
Department for Children, Schools & Families
Department for Culture Media and Sport
Department for Energy and Climate Change
Department for Environment, Food and Rural Affairs
Department for Transport
Department of Health
Foreign & Commonwealth Office
Government Equalities Office
Government Office for the West Midlands
Ministry of Justice
Northern Ireland Office
Office of National Statistics
Royal Botanic Garden Edinburgh
Treasury Solicitor’s Department
UK Statistics Authority
Bedford Borough Council
Borough of Poole
Brighton & Hove City Council
Brighton and Hove Police Division
Bristol City Council
Cambridge City Council
Cambridgeshire County Council
Canterbury City Council
Cheshire West and Chester Council
Darlington Borough Council
East Riding of Yorkshire Council
Eastleigh Borough Council
Essex County Council
Exeter City Council
Greater Manchester Fire and Rescue Service
Kent County Council
Lancashire County Council
Lancaster City Council
Leeds City Council
Leicestershire County Council
London borough of Lambeth
London Borough of Lewisham
London Borough of Richmond upon Thames
London Borough of Tower Hamlets
Neilson Active Holidays
North Kesteven District Council
North Lincolnshire Council
Sefton Metropolitan Borough Council
South Gloucestershire Council
South Tyneside Council
Southampton City Council
Southend-on-Sea Borough Council
Stockton-on-Tees Borough Council
Watford Borough Council
West Sussex County Council
Wolverhampton City Council
3K UK PLC Aycliffe Plant
Brighton & Hove Bus Company
Company Z Ltd
Cycling Instructor Ltd
Edinburgh Bicycle Co-operative
Ernst & Young
F.W. Evans Cycles (UK) Ltd
Finsbury Orthopaedics Ltd.
Halcrow (Exeter office)
Integrated Transport Planning Ltd
Journey Latin America
MHA Planning & Transport
Nine Four Ltd
Pedersen UK Ltd
Pinewood Studios Group
Process Focus Ltd
Richard Armitage Transport Consultancy
SK Transport Planning
Steer Davies Gleave
The Adidas Group
Wheelies Direct Cycle Solutions
White Label UK
Canterbury Christ Church University
Leeds Metropolitan University
Leeds Trinity University College
Link Secondary School
Newcastle College Group
South Leicestershire College
The Arts University College at Bournemouth
The Open University
University of Bristol
University of Central Lancashire
University of Leicester
University of Oxford
University of Sheffield
Business in the Community CTC
London Cycling Campaign
North Yorkshire Sport
Berkshire West NHS
Brighton & Hove City PCT
Calderdale & Huddersfield NHS Foundation Trust
Calderstones Partnership NHS Foundation Trust
Cheshire and Wirral Partnership NHS Foundation Trust
Countess of Chester Foundation Trust
Dr Smith and Partners
East Cheshire NHS Trust
Leeds Teaching Hospitals Foundation Trust
NHS Halton & St Helen’s
NHS Kensington and Chelsea
NHS North Lancashire
NHS North West (SHA)
NHS Northern Lincolnshire & Goole Hospitals NHS Trust
NHS Nottingham City
NHS South West (SHA)
NHS Wirral PCT
North Bristol NHS Trust
North Cumbria University Hospitals NHS Trust
Penine Care NHS Foundation Trust
Royal Liverpool and Broadgreen University Hospitals NHS Trust
Salford Royal NHS Foundation Trust
Sheffield Teaching Hospitals NHS Foundation Trust
Southport & Ormskirk Hospital NHS Trust
Stepping Hill Foundation Hospital Trust
Stockton on Tees Teaching PCT
University College London Hospitals NHS Trust
University Hospital of South Manchester NHS Foundation Trust
University Hospitals of Leicester NHS Trust
University Hospitals of Morecambe Bay NHS Trust
Worcestershire Health Services NHS Trust
York Hospitals NHS Trust
HMRC & FMV
The August 2010 ‘fair market value’ rule clarification by Her Majesty’s Customs and Excise threw the Cycle to Work world into a tizzy. The Cycle to Work Alliance (Halfords, Evans Cycles and Cyclescheme) immediately urged the HMRC to re-think the rule revision.
A statement from the group said: “HMRC’s transfer of ownership matrix…will simplify the administrative burden for employers who implement the Cycle to Work scheme. However, the Alliance is concerned that it may erode the scheme. The matrix could make it too expensive to purchase the bike after the hire period.”
The official spokesperson for the Cycle to Work Alliance is Marc Woolfson of Westminster Advisors.
Complaining about the scheme’s potential scuppering, Woolfson said:
“The Cycle to Work scheme demands ongoing support and should not be eroded, it is the glue that helps Government deliver its agenda on health and sustainable travel. The Department for Transport and HMRC must work in unison to make the scheme economically attractive to participants.”
A statement from the Cycle to Work Alliance said: “The Alliance is concerned that HMRC’s matrix is undermining the scheme and the Government’s agenda on sustainable transport, health and employee engagement.
“The matrix does take into account the age of the bicycle, however it doesn’t consider its condition. This risks undermining the economic competitiveness of the scheme as would unfairly penalise users, forcing them to pay an artificially inflated price for their bike at the end of the hire period.
“The Alliance is worried therefore the scheme may seem less attractive, reducing take up, and hampering delivery of the Government’s priorities on the low carbon economy and on active living.”
However, not all those financially interested in the Cycle to Work scheme think it’s dead in the water.
On the trade-only forum of BikeBiz.com, one bike shop said: “From my reading of [HMRC’s rule change] the employer can sell the bike to the employee for whatever they like, ie £5. However the difference between the amount that the employee pays for the bike and HMRC’s valuation of the bike would become a benefit in kind and therefore taxable.
“So £1000 bike (£850 ex vat): HMRC’s valuation £250
“Employee pays £5 for the bike, and Tax/NI on £245 (£54 Tax + £25NI) So, in effect, pays a final payment of £84.
“This is still a massive saving.”
CTC Senior Technical Officer Chris Juden agrees there are still significant savings to be made:
“All that’s happened is that where an employee might previously have made savings on 95 percent of the bike’s value, one can now make the same savings on ‘only’ 75 percent of it. So the total savings, per bike, reduce to 79 percent of their former magnitude.
“Here’s my maths. The total savings comprise: (1) VAT at 17.5 percent on the price of a bike minus its residual value. What’s left is the cost of the bike to the employer, on which can be reclaimed through salary sacrifice: (2) Income tax at 20 percent, (3) employee National Insurance at 11 percent, and (4) employer’s NI at 12.8 percent. Taking a residual value of 5 percent those four factors combine to provide a total saving of 51 percent, or 41 percent if the employer trousers NI savings to offset administration costs. If the residual value must instead be 25 percent, these savings fall to 43 percent or 34 percent respectively. Not as high, but still very worthwhile.
“Nobody really thinks a bike is worth only 5 percent of its purchase price after one year’s riding to work. Even 25 percent is a steal, so I think we should be glad that HMRC have swept away a great big area of uncertainty that was putting off quite a lot of employers from getting into the scheme in the first place.”
There has been no official clarification of the new rule from HMRC but it is Bike Hub’s understanding that a large (sort of nationalised) bank has brokered an agreement with HMRC which, in theory, could be extrapolated nationwide and save a lot of heartache for employees already on the scheme. This agreement is that the worth of the bike will not be retrospectively changed so anybody on existing schemes need not worry about the Fair Market Value when their final payment is due. In other words, it appears HMRC’s new rule will be applied only to new sign-ups.