Q Who should employers offer the cycle-to-work benefit to?
A In theory it should be offered to all employees, but because of tax exemption and salary sacrifice rules care must be taken if offering the option to those on or close to the minimum wage and those close to retirement who are members of defined benefit pension schemes.
To qualify for the tax exemption, says the the Department for Transport, the cycles and cyclists’ safety equipment loaned by the employer under the scheme must be available to employees generally with no groups of employees excluded. As for under-18s – don’t even go there as consumer credit law makes agreements with them difficult and it may mean entering into an agreement with a parent or guardian. But employers could offer them bikes from a pool.
Q What equipment is included under the tax exemption?
A The exemption applies to pedal bicycle or tricycles and electrically powered bikes. It will probably also include cycling equipment, though this is not defined in the regulations and may require the agreement of an employer’s local tax office. But it will almost certainly include:
- Cycle helmets
- Safety equipment (for example, high-visibility clothing)
- Mirrors and mudguards
- Panniers and luggage carriers
- Repair kits.
Q What value of equipment can be supplied by the employer?
A This is where life can get complicated. Employers loaning cycle equipment to employees through a cycle-to-work scheme will likely have to comply with the Consumer Credit Act and would be well advised to get a group consumer licence from the Office of Fair Trading. This stipulates that the maximum value of the goods loaned by the employer to the employee under a cycle-to-work scheme is £1,000 for a period that must not exceed 18 months. Specialist suppliers can deal with this issue and advise on it.
Q The Consumer Credit Act – that sounds complicated?
A Well, yes it does. Group licences are available to employers so that they don’t need one for every agreement with an employee. To comply with the Consumer Credit Act, the employer-employee agreement must be for hire only and not for hire purchase. The employee has the right under s101 of the Act to terminate the agreement after 18 months or to give three months’ notice or one interval of payment – whichever is the shorter – if they want to terminate the agreement after less than 18 months. The Cycle to Work Group Credit Licence can be viewed here.
The employee may also have the right to a cooling-off period after the agreement has been signed, but this usually only applies if he/she signs the agreement away from the place of employment.
Again, a good third-party cycle-to-work provider will ease the pressure here.
Q Does the employer need permission to set up a cycle-to-work scheme?
A No, and that applies also if it relies on salary sacrifice. However, HMRC will advise on this. More information on salary sacrifices is available here.
Q What is the scope of the tax exemption?
A The exemption removes the tax charge that would otherwise apply to cycles and cyclists’ safety equipment loaned to employees provided certain conditions are met. These include: ownership of the equipment is not transferred to the employee during the loan period; the bike supplied is used for commuting to and from work; the cycle-to-work benefit is offered to all employees; the bike can be used on trains.
If the employee does not use the supplied equipment as specified then the benefit could be viewed by HMRC as a taxable benefit in kind. Although employers and employees do not have to log cycle-to-work mileage, the former must tell the latter that the loaned equipment has to be used for commuting.
Q What is salary sacrifice and how does it apply to cycle-to-work schemes?
A Basically, salary sacrifice involves the employee giving up part of his/her gross salary to pay for a benefit and that part is not subject to income tax or national insurance contributions (NICs). Nor does the employer pay NICs on the sum sacrificed by the employee.
For example: if it is assumed that the employee is loaned equipment worth £500 over a period of 18 months, they could sacrifice £6.41 per week from their gross salary. Net of tax and NICs this would be £4.42 for a basic rate taxpayer (20% income tax plus 11% NICs) and £3.78 for a higher-rate tax payer (40% income tax plus 1% employee NICs).
The employer will save Secondary Class 1 NICs (at up to 12.8%) on the part of the employee’s gross pay that has been sacrificed. Therefore if an employee was to loan a bike and kit worth £500 over 18 months, he/she would sacrifice £500 of gross salary, which would generate employer’s Class 1 NIC savings of £64 per employee. More information on salary sacrifices is available here.
Employers should also note, that the new rules on the VAT treatment of certain benefits provided under salary-sacrifice schemes mean that employers must now account for output VAT on the supply of bicycles and safety equipment. Read more about the changes on the HMRC website.
Q Any other tax benefits for employers?
A Yes, those employers that buy bikes and equipment to loan to employees under cycle-to-work schemes can treat the cost as capital expenditure and therefore claim capital allowances. For example:
- Cost of cycle in year 1 = £500
- Amount of capital allowance due in year 1 is £500 x 20% = £100
- Amount of capital allowance due in year 2 is £400 x 20% = £80
- And so on at 20% per year on the reducing balance.
For expenditure incurred in the year 2009-10, all businesses can claim the temporary 40% first-year allowance (FYA) on their spending on most plant and machinery, which can include cycles and cyclists’ safety equipment, for any expenditure not covered by the Annual Investment Allowance. For example:
- Cost of cycle in year 1 = £500
- Amount of FYA due in year 1 is £500 x 40% = £200
- Amount of capital allowance due in year 2 is £300 x 20% = £60
- And so on at 20% per year on the reducing balance.
If in doubt, speak to a cycle-to-work provider or to your local tax office.
Q How might salary sacrifice affect low-paid workers?
A This can be a minefield for employers and employees. The Department of Transport says a salary sacrifice arrangement cannot be used if in so doing the employee’s gross pay drops below the national minimum wage (NMW) – currently £5.80 for adults. In situations where an employer has staff near the NMW, it suggests the employee be offered a lower value cycle package and/or a longer than usual hire period to avoid the salary dropping below the NMW, and therefore being excluded from the scheme.
To illustrate this, if an employer provided a cycle that costs the employer £170, together with safety equipment that cost £38, the total cost would be £208. If the employee sacrificed a total of £208 of salary over a two-year period, this would result in a sacrifice of £2 of salary per week, which would (depending on hours worked) be achievable for employees earning at least a few pence per hour above the NMW hourly rate. Alternatively, employers could provide a pool of cycles that low-paid employees could borrow and thus avoid he need for salary sacrifice.
Q Any other related issues?
A Yes – care needs to been taken on offering salary sacrifice to employees who may be claiming benefits as it may impact their entitlements because of reduced NICs. This can apply to maternity pay and sick pay. Also, employees nearing retirement may not benefit from salary sacrifice, especially if they are on final salary schemes. More information on possible exclusions from salary sacrifices is available here.
Value added tax (VAT)
This is not payable on cycling equipment that has been loaned to the employee under a cycle-to-work scheme, which they use via salary sacrifice. However, if the employee buys the equipment at the end of the agreed loan period then VAT is charged on the sale price.
It makes sense for bikes to be insured and this can be done on the employee’s home contents insurance or on company insurance. Just make sure it’s in place.
Employers can pay up to 20 pence per mile tax free to employees who use their own cycles for business travel. Journeys between home and work are not business travel for this purpose.
An employer’s payroll system must be able to handle salary sacrifice. If it doesn’t then you either amend it, instruct your third-party supplier/operator to do so, or give up. Without salary sacrifice, a cycle-to-work scheme will not get off the ground, although employers can buy bikes and run a loan pool for interested employees.
Q Do we have to provide sheds and showers?
A No, only employers who commit to the Department of Transport’s Cycle to Work Guarantee Scheme have to provide storage, changing and showering facilities.
Local authorities, which have budgets to promote cycling, may provide Sheffield Stands (upturned U-bars) free of charge or at reduced cost. Contact them to find out. In any case, costs of storage and changing facilities can be offset against the annual capital tax allowance.
Q What happens at the end of the hire agreement?
A At the end of the hire agreement, the employer must offer participating employees the option to buy the loaned bike at a fair market value.
Q How is the fair market value calculated ?
A One way is to look at websites which sell used bikes such as Gumtree or eBay. The problem is that you might not be able to find a good match. If you use a third-party specialist, they should be able to give you a fair market value. Rob Howes, managing director of cycle-to-work scheme provider Cycle2Work Now, says it has access to an online market and can give a fair market value for the bikes it supplies.
If the employee does not want to buy the bike, the employer can sell it where it chooses or use it to build a bike pool.