Many people are baffled by HM’s Revenues and Customs attempt to clarify the details of the Cycle to Work scheme which allows employees allows employees to save up to 50% on a bike’s retail price. The announcement made at end of August has provoked fervent debate. After a few weeks of reflection, what conclusions can be drawn?
Before the clarification Employees previously were allowed to purchase the scheme bicycle from their employer at the end of the rental period, at a nominal amount, generally £10. This however was a travesty of the regulation which expressly stated that the transaction should be effected at fair market value, which for a decent one-year old bicycle should be close to 50%. Of course, this is an inherent inconsistency of the scheme, whereby the tax man first offers a discount and then takes a large chunk back.
Terms after the clarification
HMRC decided to shed light in this grey area by quantifying the fair market value, according to initial value and age of the bicycle. You can find the formula here. For example, a £500 bicycle would be deemed to be worth £125 after one year. If the employee pays £10 for the bicycle a taxable benefit in kind of £115 arises.
What does this mean if you are currently involved in the Cycle to Work scheme?
The adjustment of the government’s scheme will not only apply to new employees wishing to acquire a bicycle, but in retrospect, to current individuals already involved in the scheme. So it is definitely worth investigating how these changes affect what fair market value of your bike you will have to pay on completion of the payment period. However, employees can sidestep the requirement to pay fair market value for their bike once the repayment period concludes: just don’t buy back the bicycle! After five to six years the bicycle is assessed to be of negligible value and a transfer will not cause a tax charge.
Beware of the risks of not buying the bicycle
1. You might want to leave the employer before the five years are up. If the relations are not good, the employer may just keep the bicycle.
2. Strictly speaking using the employer’s bicycle for free is a benefit in kind and taxable. The HMRC is being silent about this aspect but they could offer more “clarifications” and tax this solution as well.
Image by Reuters, via FlavorWire
Actually, re: the last point, there was a legislative change at the start of the scheme to the effect that no benefit in kind arises from the *use* of the bicycle. Quite why they didn’t finish the job and include in that the ownership of the same is beyond me!
Why should this tax scheme only be open to the employed as opposed to the self employed?
When it comes down to it the biggest scandal has always been that people on minimum wage get no help at all with a bike, even though they are the group least likely to want to spend money driving, and least able to afford a decent ride.