The cycle to work scheme allows employers to provide employees with bicycles and bicycle safety equipment as a tax-free benefit. The scheme is part of the Government’s Green Transport Plan and is designed to promote healthy journeys and reduce pollution.
How does the scheme work?
The employer purchases or takes out a lease on the bicycle and/or safety equipment. An agreement is then signed with the employee who is loaned the equipment for an agreed period (typically 12 to 18 months). The monetary value is treated as a tax free benefit, thereby saving Income Tax and Class 1 National Insurance Contributions (NIC) for the employee, and Class 1A NIC for the employer.
The employer may want to recover all or part of the cost of loaning the bicycle and/or safety equipment to the employee. The loan payments will usually be taken out of the employee’s salary through a ‘salary sacrifice’ arrangement. This means the employee accepts a lower salary in return for the benefit – being the loan of the bicycle and/or safety equipment.
Who is eligible for the scheme?
Employers of all sizes in the public, private and voluntary sector can implement the scheme.
What equipment is covered by the exemption?
Eligible equipment includes bicycles and safety equipment, the equipment could include:
- Bicycle helmets
- Bells and bulb horns
- Lights including dynamo packs
- Mirrors and mudguards
- Bicycle clips and dress guards
- Panniers, luggage carriers and straps
- Child safety seats
- Locks and chains
- Pumps, puncture repair kits and bicycle tool kits
- Reflective clothing and bicycle reflectors.
Is there a limit on the value of equipment that can be supplied tax free?
There is no limit to the total value of bicycle and equipment, but employers usually have a limit of £1,000 (including VAT) per employee as otherwise it is necessary to apply for a consumer credit licence. It is possible to loan two bicycles to one employee, which might be useful if an employee needs a bicycle either side of a train journey.
Are there any conditions that need to be met?
Yes:
- Ownership of the equipment must not be transferred to the employee during the loan period;
- Employees must use the equipment mainly (more than 50% of the time) for qualifying journeys, which are defined as:
- between their home and workplace;
- between one workplace and another, in connection with the performance of their duties of employment; or
- to and from the train station to get to work.
- The offer of the use of a loaned or provided bicycle must be available to the whole workforce with no groups excluded (although this does not necessarily have to be through a cycle to work salary sacrifice arrangement).
What records do employees need to keep?
Although employees are not expected to keep mileage records, employers should make it clear to employees that if they do not use the bicycle mainly for qualifying journeys, they may lose the tax exemption.
How does an employer set up a scheme for their employees?
The employer can either administer the scheme themselves or use a third party provider. The basic two options are:
Salary plus
This is where the employer simply buys a bicycle and equipment and loans it to an employee for qualifying journeys. This does not affect the employee’s normal salary. The employer would not receive any contribution towards the cost from the employee, but would be able to reclaim the VAT incurred under the normal rules and would be able to claim capital allowances.
Salary sacrifice
As mentioned earlier this is where an employee gives up the right to receive part of their pay for the loan of the bicycle and equipment. The employee will then receive a tax free benefit in kind (BIK) instead of salary on which tax and NIC would have been payable. The employer will also save Secondary Class 1 NICs on the part of the employee’s gross salary sacrificed.
A salary sacrifice arrangement cannot be used if it reduces the employee’s gross pay to below the National Minimum Wage. It is also important that the employer advises employees of the potential effect of the scheme on other matters such as pension contributions, state pension maternity allowance and statutory sick pay.
What capital allowances can be claimed?
The bicycles and equipment loaned will qualify for capital allowances. There is currently an annual investment allowance (AIA) which allows for 100% of expenditure up to £1 million (up until 31 December 2020) to be relieved against income from the business. Therefore, the entire cost can be claimed as expenditure, provided the AIA for that year has not been exceeded, in which case the equipment will qualify for the 18% writing-down allowance.
Is it easy to withdraw from the scheme?
This will depend on the terms of the agreement for the loan of the equipment. This is why it is important that the terms of the agreement between the employer and employee are clear before signing.
Particular consideration should also be given to the implications of an employee leaving employment. The employer, for example, may seek compensation if his costs have not been offset due to the non-completion of the term of the salary sacrifice arrangement.
What are the VAT implications of the scheme?
Where the employer purchases or leases bicycles and cyclist’s safety equipment, VAT is incurred on the cost at the point of purchase or leasing. This does not include crash helmets which are zero rated.
Where the equipment is for use in a cycle to work scheme for employees, HMRC accept that VAT incurred is for the purpose of the business of the employer and may be treated as input tax. The benefits are seen as attracting, retaining and motivating employees and promoting a healthier workforce. From 1 January 2012, output tax is due on the salary sacrifice payments made by the employee where the agreement was drawn up after 27 July 2011.
What if the employee wants to keep the bicycle?
At the end of the loan period the employer usually wants to give the employee the option to purchase the equipment under a separate agreement. The transfer must be at full market value or a taxable BIK will arise (to establish the market value you should refer to HMRC’s table of percentages). Unfortunately, no tax relief is available on the transfer, so if the price is recovered from salary it will need to be deducted from the employee’s net salary, and VAT will be also be payable by the employee.
The employer must be careful if they have claimed capital allowances for the entire cost of the equipment that the sale proceeds are recorded in the capital allowances pool.