Background
Within the Government’s Green Transport Plan, there’s a tax exemption which allows employers to provide cycles and safety equipment to employees as a tax-free benefit. The bicycle should be used primarily for commuting to work to qualify for the tax breaks. The employer buys the bikes and safety accessories at full retail price, including VAT which is reclaimed in the normal way, if applicable. Employees hire the bicycles from the employer, usually for a 12 month hire period although some companies offer an 18 month hire period. Most employers charge the employee a hire fee spread over 12 months - this can be taken from gross pay via a salary sacrifice, or paid from a flexible benefits allowance. In this way the employee saves tax and National Insurance and spreads the cost of hiring a bike over a period, whilst the employer saves on Employer National Insurance.
Due to Consumer Credit legislation most companies limit the value of the bicycle to £1000. Many providers of this benefit actually operate a voucher system whereby the employee is given a voucher with which to purchase a bicycle and associated equipment.
At the end of the hire period, the employer may choose to sell the bike, often this is to the employee. However, in line with guidelines the employee does not have the right to purchase the bike as this would constitute a Hire-Purchase agreement. If the employer does sell the bike to the employee then the employee should be charged what HMRC describes as “Fair Market Value”. This value is taken from net pay and transfer of ownership documents should be completed.
The problem
HMRC recently provided clarification over the “Fair Market Value” as employers were often transferring the ownership of the bikes to their employees at a nominal value. At the end of a 1 year period a bicycle originally worth up to £500 is deemed to have a fair market value of 18%, above £500, of 25%.
This makes the scheme look less attractive, if employers are charging a hire cost equivalent to the value of the bike/voucher, and then charging the employee up to 25% to purchase the bicycle at the end of the period. Usually this is not actually the case as many employers discount the cost to employees by the VAT, and there are also the tax and NI savings to factor in.
There are two issues: firstly, employees who are currently hiring bicycles will want clarification over the possible impact, secondly, employees considering hiring bikes.
The solution?
There are a range of solutions. Two key points should be borne in mind. Firstly, the employer does not have to charge the employee a hire fee equivalent to the purchase price of the bicycle. Secondly, the hire period does not have to correspond with a salary sacrifice or employer subsidy period. Consequently, most providers of cycle to work schemes have issued guidance around these two points.
Existing employees with hire agreements for bicycles:
As these employees are already affected by the changes the most practical solution is to allow the employees the option to continue to hire the bike. A new hire agreement or an addendum to the existing hire agreement can be created and a longer hire term stipulated.
New Hire Agreements:
If offering existing employees the option to extend the hire term, then it would seem sensible to adopt a consistent approach. Therefore, a longer hire term, but a “payment” term of 12 months could be adopted.
Further information & next steps:
Redbourne would therefore, suggest three courses of action are available:
- accepting guidance from the cycle to work provider
- seeking advice from clients' tax advisers
- Contacting Redbourne who will provide advice in conjunction with our tax advisers which may incur a charge
Further information can be obtained from HMRC http://www.hmrc.gov.uk/manuals/eimanual/eim21667a.htm
