How can employers can provide an employee benefit that promotes a healthier worklife balance, does its bit for the environment and does not add a penny to staff costs ? Richard Grigsby explains how the cycle to work scheme operate
The Government’s cycle to work initiative is an excellent programme which benefits everyone - employees make big savings on new bikes, employers get a healthier, more motivated work force, and make significant National Insurance savings too. This was introduced in the 1999 Finance Act as an annual tax exemption which allows employers to loan cycles and cyclist’s safety equipment to employees as a tax-free benefit. This means employers do not have to contact HMRC for approval to run the scheme. The exemption was one of a series of measures introduced under the Government’s Green Transport Plan. A comprehensive set of guidance notes is downloadable from the Department for Transport’s website. (see note 1 below).
How the programme works
To take advantage of the tax and NI exemption, employers can buy a cycle and cyclists safety equipment, reclaim the VAT, make use of the capital allowances and loan it to an employee for qualifying journeys to work. However such an arrangement would mean the employee’s normal salary arrangements are not affected and few employers in the current economic climate would be feeling that generous. Most employers want to recover the cost of providing the cycle and equipment loaned to the employee and this is done through a salary sacrifice arrangement.
Using the salary sacrifice arrangement. This is when an employee agrees to give up part of their pay in return for their employer to provide some form of non-cash benefit, in this case the loan of a bicycle and related safety equipment. Savings are made because salary sacrifice reduces the gross salary - before any tax or NI has been deducted - so the amount of tax and NI paid is less than usual. Employers who are able to offer VAT savings to their employees further contribute to the total savings.
What are the savings? Typical savings are equivalent to 40% of the price of the bike and equipment but the precise amount depends on the employee’s personal tax band. An individual being taxed at the higher rate will save a bit more (around 50%) than someone who pays standard rate tax. Some employers cannot reclaim VAT in the normal way so the savings are not as great; the NHS is a good example. In this case expected savings are 29% or 40%.
Adding the ability to spread payments over one year still means that great benefits are to be made. It is at the discretion of the employer if they pass on the VAT saving; some employers will retain the VAT to offset any administration costs. If the employer uses external finance to buy the bikes, then savings may be around 5% less than quoted above.
For generic examples of savings, please see the savings calculator on www.cyclescheme.co.uk, and if an employer has signed up to Cyclescheme their employees will be able to see exactly how much they can save by using their employer code.
Ownership of the bike. The bike and equipment remain the property of the employer throughout the hire period. If the employer buys the bikes using external finance then the finance company will own the bikes during the hire period and not the employer. The employee will not own the bike unless offered ownership for a fair market value on completion of the loan period.
What happens at the end of the hire period? It’s the employer’s choice whether they opt to sell their employee the bike at the end of the hire period. If the employee chooses to become the owner of the equipment, they may be offered the opportunity to pay the fair market value for them from their net salary. Ownership of the equipment transfers to the employee upon receipt of cleared funds.
How much is a fair market value? This cannot be stated before or during the hire period as any guarantee that employees will be given the option to own the bike may constitute a benefit in kind, such as hire purchase, which would not qualify for the tax savings. If the employer decides to offer their employees ownership it is up to the employer to decide how much the fair market value will be and is subject to VAT.
Why can’t the employer just give the employee the bike for free after the hire period? This fair market value payment is essential if the employee is to legitimately own the bike after receiving tax benefits throughout the hire period. The fair market value amount cannot be stated before or during the hire period as this could be considered a benefit in kind, such as hire purchase, which does not warrant any tax relief.
Using Cyclescheme
Many employers prefer to outsource the administration of bike provision to a third party provider of tax-free bikes and here at Cyclescheme we provide a one stop shop service designed to minimise staff administration time spent internally which is completely free of charge to all employers - we finance this service via commissions from the bike shops in our supplier network. Employers also benefit from added value of populated employee hire agreements, our telephone help desk and a supply of promotional material for the workplace.
Our supplier network comprises 1300 shops and we work with employers of all sizes. Our larger customers include the Department for Transport, ASDA, Airbus, Grass Roots Group and Devon County Council to name a few.
The following summary explains how employers can use Cyclescheme to take advantage of a government concession that does not need to cost the employer anything.
Summary of Cyclescheme procedure
- Employee chooses a bike and safety equipment and requests the package through the Cyclescheme website (www.cyclescheme.co.uk).
- Before the request is submitted, the employee will be required to agree to the terms and conditions of a hire agreement, which states the amount his/her salary will be reduced by each month.
- The employer pays an invoice from Cyclescheme for the full retail amount.
- Cyclescheme posts out a secure voucher to the employee.
- The employee’s gross salary is reduced by the net amount of the equipment and spread over a 12- month period to coincide with the hire term.
- On completion of the hire term the employer may choose to offer the employee ownership of the bike for a fair market value
Note 1. www.dft.gov.uk/pgr/sustainable/cycling/cycletoworkschemeimplementat5732
Note 2. For more information on how the scheme works if you use Cyclescheme services, please visit our website (www.cyclescheme.co.uk) or call our helpdesk team on 01225 448933