HMRC has now clarified its position around the Government’s Cycle to Work scheme, which loans bikes and safety equipment, tax free, to employees within a part of a salary sacrifice agreement. The estimated percentage value of the cycles at the end of the loan has been increased from 5% to 18% after one year.
According to HMRC it is common for cycles provided under salary-sacrifice arrangements to be sold or transferred to employees after the end of a period of loan. The exemption for certain loaned cycles will not apply if any agreement builds in from the outset an automatic transfer of ownership to the employee at the end of a loan or hire period.
However, where this is not the case, there is no contradiction in an earlier exempt loan being followed by a decision by the employee to buy the cycle.
The guidelines state if a cycle is transferred to an employee after a period of use as a benefit during which the tax exemption applied, the transfer may be taxable either as earnings or as a benefit. In either case, as long as any payment that the employee makes for the cycle is equal to or more than the market value, there will be no tax charge under the employment income rules. If the employee pays less than market value, the difference will be taxable as employment income.
HMRC has also composed a table for employers to work out the market value for second hand cycles. This means a bicycle that costs £500 new will be worth 18% of that in a year, going down to 16% after 18 months, 13% after two years. After five years, the price will be negligible.
Currently,a £500 bike would cost an employee £41.66/month from their gross salary (this is without finance costs, or passing back any VAT savings, so it could be a little less). At the end of the 12 month loan, Lorica’s current provider would say the "fair market value" is equivalent to one further monthly payment from net salary which would be £41.66. Under the new rules, the 18% (from gross salary) would be £90.
The Cycle to Work Alliance, which brings together cycle-to-work scheme providers, claims the guidelines will simplify the administrative burden for employers who implement the cycle-to-work scheme. But it is concerned the new system may erode the scheme. The system could make it too expensive to purchase the bike after the hire period.
The Alliance is concerned that HMRC’s system is undermining the scheme and the Government’s agenda on sustainable transport, health and employee engagement. The guidelines do not take into account the condition of the bicycle, and risks undermining the economic competitiveness of the scheme.
This unfairly penalises users with an artificially-inflated price for their bike. The Alliance is worried there will be a reduction in the attractiveness of the scheme, reducing take up, and hampering delivery of the Government’s priorities on the low-carbon economy and on active living.
A spokesperson for the Alliance 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."
According to the Alliance, the cycle to work scheme plays an essential role in improving public health, cutting congestion and helping Government to achieve their target of a 30% reduction of CO2 emission by 2020.
Matt Duffy, partnerships Manager at Lorica, added: "To date, the fair market value of the bike at the end of the 12 month loan has been worked out as 5% of the original value, but guidance from HMRC says that this is undervaluing most bikes of that age and they are changing it to 18% after one year. Currently, providers estimate fair market values at around 5% of RRP, or equivalent to a monthly sacrifice payment from net.
"This changes the benefit for employees and employers but doesn’t affect their current scheme if financed through our partner. We understand that lobbying is taking place for the new matrix to be adjusted to reflect more realistic percentages based on the depreciation of the equipment."
