Clarification of the tax rules on cycle-to-work schemes is causing many employers to rethink their arrangements, says Jennifer Paterson
An increasing number of employers are having to review their cycle-to-work schemes after the Department for Transport (DfT) clarified the implementation guidance for these schemes last October, and HM Revenue and Customs (HMRC) clarified the resulting tax implications in December’s pre-Budget report.
The clarifications mean that from 18 December 2009, employers have to review their existing cycle-to-work schemes as they come up for renewal.
The clarifications reiterated that for cycle-to-work loans to be exempt from income tax and national insurance (NI) contributions, the benefit must be made available to an organisation’s entire workforce and that any bicycles bought by staff must be paid for at a fair market price.
To date, some employers have put schemes in place even if a number of staff were unable to take part. Two main groups of employees that are typically unable to join a scheme are those aged under 18 who are not allowed to sign a credit sale agreement unless an adult acts as a guarantor, and those whose take-home pay would fall below the national minimum wage if they were to enter into a salary sacrifice arrangement.
The BBC, which has run a cycle-to-work scheme since 2007, and Lorica Consulting, which started one in August 2009, have both restructured their schemes to comply with the clarified rules. A BBC spokesman said: “We run the benefit in line with updated HMRC guidance and have changed the scheme recently, ensuring under-18s have access to a bike package by offering a loan agreement with a guarantor form, and improving access to low earners by reducing the minimum voucher value.”
Richard Davies, head of employee benefits at P&MM, thinks the clarified rules are a constructive step for employers and staff. “Employers have immediately seen the benefits of being able to open and offer a cycle-to-work programme to all employees,” he said.
The clarifications also refer to the importance of calculating a fair market value of a bicycle at the end of the loan period, if the employee chooses to purchase it, to avoid staff incurring a benefit-in-kind charge.
The HMRC guidance (EIM21650) stipulates: “If a cycle is transferred to an employee at a nominal value (say 5% to 10% of the original retail price), then if the market value is higher, the employee will be taxable on the difference. The [tax and NI] exemption will not apply if any agreement builds in from the outset an automatic transfer of ownership to the employee at the end of the hire period.”
Employers in a quandary
Richard Morgan, director of consultancy services at Vebnet, said: “Although it is helpful to have some clarification from HMRC, it leaves employers in something of a quandary about how to deal with the fair market value at the end of the hire period and what effect this might have on how much the employee pays via salary sacrifice if the fair market value is potentially much higher than the current typical 5-10%.
“For example, an employee may end up paying £650 for a £500 bike if they enter into a salary sacrifice for £500 and then pay a fair market value of £150 to transfer ownership.”
A further restriction on this salary sacrifice perk is looming because of the administrative burden in ensuring it is available to all, says Karen Thomson, associate director of policy, research and strategic visibility at the Institute of Payroll Professionals. “It seems ridiculous that an employer has to comply with so many laws and regulations, tries to help the environment by encouraging staff to cycle to work, and then is told those same laws and regulations will prevent them doing so.”
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