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HMRC clarifies VAT requirements for cycle to work schemes

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In response to a recent European Court of Justice judgement, 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.

This ruling means from 1 January 2012, employers must charge employees VAT on supply of bikes made available to them under such schemes.

The Cycle to Work Alliance believes the new rulings are a helpful clarification on the tax implications of the scheme for participating companies. Scheme participants can now plan with certainty on how to apply the benefits of the cycle to work scheme for their employees.

The scheme offers participants benefits in terms of savings on the purchase of a bicycle. These will typically amount to up to 43% savings even after the application of the new ruling.

The new ruling on VAT does not mean a blanket reduction in benefit of 20%. Some scheme participants such as financial service companies, and partially exempt organisations, will now get additional benefits as they will be able to recover the VAT in full and this enhances the attractiveness of the scheme for such providers.

For those already fully VAT registered the impact on savings will not apply at 20% of the purchase value of the bike as this will be offset by an increase in Income Tax and National Insurance Contributions' savings, which will continue to apply.

Savings under the scheme vary according to individual tax circumstances of companies. Scheme providers Cyclescheme, Cycles Solutions, Evans Cycles and Halfords, will now work with clients, and others keen to be involved in the scheme, to prepare bespoke packages to ensure companies receive the maximum saving allowances and therefore benefits for participating employees.

The Cycle to Work Alliance has also welcomed HMRC's decision to delay the introduction of the new VAT treatments until the 1st January 2012, this provides the industry with five months lead time to incorporate the new rulings into scheme guidelines.

Charles Ashwell, Halfords Cycle2work corporate sales manager said: "The new ruling removes the final element of uncertainty about exactly how schemes should operate going forward, and in so doing, strengthens it further. Halfords continues to invest in its development and future."