New guidance hits Cycle to Work discount

By Richard Peace | Monday, August 16, 2010 11.00am

Providers of the UK's Cycle to Work scheme have raised concerns about new guidance from HM Revenue & Customs (the taxman) – saying it will make it significantly more expensive for workers to buy a bike.

The way the scheme works is that an employer buys a bike of their employee's choice and then hires it to them for a set period (usually a year). At the end of this period, the worker can generally buy the bike for its (second-hand) market value.

Savings are made because the employer doesn't have to pay VAT on the original purchase and the employee pays for the monthly hire via salary sacrifice, which lowers the amount of income tax and national insurance he/she has to pay.

Until now, it has been up to the employer or scheme provider to decide the 'full market value' figure, and this has sometimes been as low as five percent of the original price. Typical overall savings have ranged from 40 to 50 percent, depending on the worker's tax band.

However, HMRC have now issued a table of values for second-hand bikes, and in many cases these are significantly higher than the sums previously being paid. For example for a bike costing over £500 is now valued at £125 after a year.

The Cycle to Work Alliance, a group of leading providers of the scheme including Halfords, Evans Cycles and Cyclescheme, have welcomed the new pricing table, as it simplifies the administrative burden for employers.

But they warn: "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.”

If a worker earning £1,000 a month (with no pension or other salary sacrifice outgoings) hires a £1,000 bike for a year via Cyclescheme they can expect to pay monthly instalments of £48.94, or a total of £587.23.

Previously, they could have bought the bike at the end of the year for as little as five percent – £50 – giving a total cost of £637.23. This represents a saving of £362.77 (36%). Now they'll have to pay a final sum of 25 percent – £250 – increasing the total layout to £837.23.

That's still a saving of £162.77 (16%), but the employee could conceivably get a bigger discount by ignoring the Cycle to Work scheme (where bikes generally have to be bought at full RRP) and getting a bike in a sale. Of course, this assumes the worker has enough money to pay for a bike up front, or can arrange interest-free credit.

There is another option, however: the employer can choose to sell the bike for less than the value on the table. In this case, the worker is liable to pay tax on the difference between the amount they pay and the value specified in the table, unless they can prove the bike is worth considerably less than the HMRC figure – for example, if it is in particularly bad condition.

So, if the employer charges five percent (£50) and the employee pays income tax and national insurance (31%) on the other 20 percent (£245) demanded by the HMRC table, that adds up to £75.95, giving a total spend of £713.18 and a saving of £286.82 (29%).

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Although that's less of a reduction than before, it's still more than you're likely to save on a 2010 bike in the sales. Chris Peck, policy co-ordinator for UK cyclists' organisation CTC, said, "On a quick calculation we believe that the savings (not including administrative costs to run the scheme) would be 29 percent for a basic rate tax payer and 42 percent for a higher rate tax payer when buying the bike after a 12-month hire contract. Those are still very good terms."

Unfortunately for commuters, another major change to the Cycle to Work scheme may be on the horizon. A recent European Court of Justice ruling means that VAT is now payable on retail vouchers bought via salary sacrifice schemes – such as the vouchers given to employees to pay for their Cycle to Work bikes.

This ruling hasn't yet been implemented in the UK, but if it is, businesses will no longer be able to recover VAT on the bikes (and are sure to pass the extra expense onto their workers) and may even be faced with some backpayments. 

Figures from Halfords suggest that in just over 10 years, 400,000 people from over 25,000 firms have joined the Cycle to Work scheme.

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