Cycle to work - Extended Hire Period

RufusA

This came up in another thread, but thought it was worth mentioning on it's own.

Many schemes offer an extended hire period for an additional 3 years to mitigate HMRC's suggested FMV at the end of the first year. Whilst this may save tax, it does restrict what you can do with the bike, as you do not have an option to take ownership until the end of the extended period.

I asked for some clarification from CycleScheme and their response was:

I would like to advise you that you are not able to sell the bike if you opt to extend your agreement as Cyclescheme would be the owner. Unfortunately the employees are not able to assign there extend agreement to someone else as the agreement the employee signed up to is between them self and Cyclescheme for the full 3 year extension. The employee would not be able to opt out of the extended agreement to take full ownership though the agreement, they would need to hire the bike for the full 3 years, unless the employee wishes to return the equipment.

Whilst this is fine for many, for those who plan to change their bikes every couple of years, an extension may not be a viable option!

Rufus.[/list]

castlelad

In my case buying the bike outright from cyclescheme would/will cost me more than just buying the bike in the first place ! So i plan on "hiring" for another 3 yrs @ a cost of £70(i had the full £1000) and getting another bike in the process,,maybe a full susser this time !

alfablue

castlelad wrote:

In my case buying the bike outright from cyclescheme would/will cost me more than just buying the bike in the first place ! So i plan on "hiring" for another 3 yrs @ a cost of £70(i had the full £1000) and getting another bike in the process,,maybe a full susser this time !

When I did this they described this pyment as a "deposit" - I presume this against the estimated fair market value after the extended period, in which case there should be no further payment requested, however, their information is obscure. Is this your understanding?

crumpetman

alfablue wrote:

castlelad wrote:

In my case buying the bike outright from cyclescheme would/will cost me more than just buying the bike in the first place ! So i plan on "hiring" for another 3 yrs @ a cost of £70(i had the full £1000) and getting another bike in the process,,maybe a full susser this time !

When I did this they described this pyment as a "deposit" - I presume this against the estimated fair market value after the extended period, in which case there should be no further payment requested, however, their information is obscure. Is this your understanding?

That is the way I read it. You pay the deposit to extend the hire period then at the end of that you can keep the bike or return it and get your deposit back.

whitestar1

crumpetman wrote:

That is the way I read it. You pay the deposit to extend the hire period then at the end of that you can keep the bike or return it and get your deposit back.

Let me get this straight - I pay monthly for 12 months based lets say on £1000 bike. Isn't the bike mine after the last payment? So you are saying that I would have to have a 3 year agreement before I get the bike free? Oh and I would still be paying each month of that 3 years a "rental"? Why would I use the C2W scheme when getting a £1000 bank load looks better? Please correct me here. I was thinking of getting my boss to sign off on this but I now cant see the point :x

t4tomo

Because you don't have to pay PAYE tax & NI on the 1000 under C2W. i.e. if you have £1000 taken out at 83.33 per month, your taken home pay is actually significantly less than 83.33 lower that it was before the scheme. how much lower depend on whether you are higher or lower rate tax payer.

its all explained on numerous other threads - just search for them

alfablue

whitestar1 wrote:

crumpetman wrote:

That is the way I read it. You pay the deposit to extend the hire period then at the end of that you can keep the bike or return it and get your deposit back.

Let me get this straight - I pay monthly for 12 months based lets say on £1000 bike. Isn't the bike mine after the last payment? So you are saying that I would have to have a 3 year agreement before I get the bike free? Oh and I would still be paying each month of that 3 years a "rental"? Why would I use the C2W scheme when getting a £1000 bank load looks better? Please correct me here. I was thinking of getting my boss to sign off on this but I now cant see the point :x

At the end of the hire period an employer may give or sell the bike to the employee. They have to charge a fair market value (FMV), or the employee is liable to tax on the benefit in kind the bike represents (i.e. you pay tax on the FMV, or the difference between FMV and what you paid). The HMRC has issued guidance on the final market value (FMV) of the bikes which suggests a £1k bike is worth a FMV of £250 after 1 year. You could therefore be given the bike, then pay tax at your rate on £250 (so £50, £100 or £125).

Cyclescheme are a company that facilitate the Cycle to Work scheme for employers, they are one of many, including some shops that run schemes such as Wiggle, Evans and Halfords. There is no need to use these companies, and indeed there are some downsides compared to the employer doing it themselves without an intermediary.

Cyclescheme have advised employers that there are tax implications because of the HMRC guidance that they really wouldn't want to deal with, so the employer should GIVE the bike to Cyclescheme (and not to the employee) wand Cyclescheme then ask the employee for the FMV to own the bike or let them pay a deposit for 31 months more hire period, the idea being that by the end the FMV is only 7% of the original value (there is no continuing monthly rental payment).

Cyclescheme do not give the option to employees of being given the bike and paying tax, and Cyclescheme just get given more bikes and money (which is a bit frustratiing).

It would be better for employees if employers said no to Cyclescheme when they ask for the bikes, and if they just gave them to employees and the employees pay the tax - simple really, but many employers have bought the Cyclescheme scare story.

Nevertheless there are still substantial savings to be had using the Cycle to Work scheme, these savings are better if you are on higher tax rates, and better if your employer does the scheme in-house as bike shops will then sell at normal prices with discounts rather than RRP or charging supplements (to pay the scheme providers commission). You also save on the interest a bank loan would attract.

Best thing to do is get the boss to sign up to it, but do it in-house, download the forms from the likes of Evans or Wiggle to use as a template. Shop where you want and get the discount you can as if an ordinary buyer. The main admin for the employer is the salary sacrifice arrangements and they still have to do this even if a 3rd party like Cyclescheme are involved. The rest of the admin is minimal. The employer can also make up to around 30% of the cost of the bike, which is no bad return over the year for a £1k investment.

pdw

The employer can also make up to around 30% of the cost of the bike, which is no bad return over the year for a £1k investment.

I didn't think it was as high as that, but it's true that the normal way that schemes are set up means that the employers make money on the deal too through reduced employers NI and reduced Corporation Tax. There's nothing to stop the company passing this saving on to the employee by charging the employee a lower rental fee.

I set up our C2W scheme so that it works out neutral to the company after taking into account employers NI, giving overall savings of 46% (basic rate) and 50% (higher rate), and as alfablue says, because this is self-run scheme, there's no issue with buying discounted bikes as the shop aren't paying the scheme operator 10%.

alfablue

pdw wrote:

The employer can also make up to around 30% of the cost of the bike, which is no bad return over the year for a £1k investment.

I didn't think it was as high as that, but it's true that the normal way that schemes are set up means that the employers make money on the deal too through reduced employers NI and reduced Corporation Tax. There's nothing to stop the company passing this saving on to the employee by charging the employee a lower rental fee.

That's based on £120 employers NI, and £200 capital allowance on a £1k bike in year 1, so £320, and if the employer charges to transfer to employee, even more.

I set up our C2W scheme so that it works out neutral to the company after taking into account employers NI, giving overall savings of 46% (basic rate) and 50% (higher rate), and as alfablue says, because this is self-run scheme, there's no issue with buying discounted bikes as the shop aren't paying the scheme operator 10%.

Well done, wish more employers did this.

whitestar1

That makes it a bit more clearer to me. I another question. I am a all year employee of a secondary school. I have three other all-year staff interested. Are there schools involved in the C2W or any other scheme? What are the arrangements?

pdw

alfablue wrote:

pdw wrote:

I didn't think it was as high as that, but it's true that the normal way that schemes are set up means that the employers make money on the deal too through reduced employers NI and reduced Corporation Tax. There's nothing to stop the company passing this saving on to the employee by charging the employee a lower rental fee.

That's based on £120 employers NI, and £200 capital allowance on a £1k bike in year 1, so £320, and if the employer charges to transfer to employee, even more.

I suppose it is that much! I did wonder about setting it up so that some of the CT saving was passed on, but it's very hard to know in advance what that's going to be.

I only set up the scheme this year, but my current plan is that next year is that the company will replace a bunch of consumables on the bike (tyres, cassette, chain, cables, brake pads) and any other stuff that needs replacing, and I'll sign a new 12 month rental to cover it. I can't find any problems with doing this under the scheme, as the bike remains the company's property and they are continuing to make it available to me in return for a salary sacrifice.

RufusA

pdw wrote:

alfablue wrote:

That's based on £120 employers NI, and £200 capital allowance on a £1k bike in year 1, so £320, and if the employer charges to transfer to employee, even more.

I suppose it is that much! I did wonder about setting it up so that some of the CT saving was passed on, but it's very hard to know in advance what that's going to be.

However it's not that simple, as a £200 capital allowance doesn't reduce a company's CT by £200, it reduces it by 26% (for a larger company) of £200 i.e. £52!

There is also the other side to the equation, the salary sacrifice £1000 and 'ers NI £120 reduce the companies costs / increase their profits. So in the first year the company will be paying EXTRA CT i.e. £1000 - £200 + £120 * 26% = £239!

They can of course take additional capital allowances in subsequent years clawing back the extra CT paid! All assuming the company remains profitable.

Can't quite get my head round what happens if the bike is transferred to a scheme provider. In theory the company has to account for the FMV of the bicycle at the point of transfer, so will never be able to offset the FMV (25%) against profit.

So as @pdw has done, self administered is the way to go!

Rufus.

RufusA

pdw wrote:

...my current plan is that next year is that the company will replace a bunch of consumables on the bike (tyres, cassette, chain, cables, brake pads) and any other stuff that needs replacing, and I'll sign a new 12 month rental to cover it.

Nice plan! FWIW our company pays for all the consumables and repairs for all the bikes, but it helps that it's a very small company, and the director enjoys cycling!

Rufus.

alfablue

RufusA wrote:

pdw wrote:

alfablue wrote:

There is also the other side to the equation, the salary sacrifice £1000 and 'ers NI £120 reduce the companies costs / increase their profits. So in the first year the company will be paying EXTRA CT i.e. £1000 - £200 + £120 * 26% = £239!

Rufus.

Thanks for the info Rufus, but if they (the employer) "lose" the bike after 1 year do they not end up tax neutral?

RufusA

alfablue wrote:

Thanks for the info Rufus, but if they (the employer) "lose" the bike after 1 year do they not end up tax neutral?

It would make sense if they did, but unless the bike is treated seperately as a short life asset (with all the associated paperwork) then the initial value gets added to the general asset pool.

The Capital Allowance will be 20% of the remaining value on a reducing value basis. So after 10 years just over £900 will have been available in capital allowances!

When the employer disposes of the bike, the asset pool remains largely untouched. In theory you should deduct the £250 FMV from the asset pool, reducing the available capital allowances in the process.

Rufus.

pdw

However it's not that simple, as a £200 capital allowance doesn't reduce a company's CT by £200, it reduces it by 26% (for a larger company) of £200 i.e. £52!

But I think the suggestion was that the capital allowance is actually £830 (or whatever the ex-VAT price of the bike was) based on including it in your annual investment allowance, so 26% gets you to £215. But of course it depends on being profitable, what your CT rate is, and whether you've got space in your annual investment allowance, etc...

There is also the other side to the equation, the salary sacrifice £1000 and 'ers NI £120 reduce the companies costs / increase their profits. So in the first year the company will be paying EXTRA CT i.e. £1000 - £200 + £120 * 26% = £239!

That's a good point. Our scheme is set up so that taking into account employer's NI it exactly pays for the bike, so I think it actually exactly cancels out the above.

Zombie_donkey

I've given up on C2W anyway. My stupid employer only runs the scheme in July so you get the bike late August. I want another bike now dammit!

Roxs

My company runs the cycle to work scheme to allow there employees to buy a bike out right, as long as you stay employed for the 12 months ( and make the agreed payments) my company considers the bike the property of the employee that was making the payments, I personaly consider any other way of looking at the cycle to work scheme as totaly unfair.

The employee makes all the payments, the goverment allows the tax to be relived in luu of payment approx 40% of the price, surley the employee gets the bike at the end.


IF THIS IS NOT THE CASE am i missing some financial implication about the whole process ??

alfablue

Roxs wrote:

The employee makes all the payments, the goverment allows the tax to be relived in luu of payment approx 40% of the price, surley the employee gets the bike at the end.


IF THIS IS NOT THE CASE am i missing some financial implication about the whole process ??

The point is that if the deal guarantees that the employee gets the bike, then it is a "hire-purchase" agreement, these do not attract the tax savings that the scheme entails. The agreement has to be for the employee to hire the bike (but not "hire-purchase"), and the employer may or may not choose to sell (or give) the bike to the employee at the end. Any suggestion in the agreement that the employee will get the bike would put the agreement outside of the tax regulations and there would be no savings.

That said, I have yet to hear of an employer that chose to do other than let the employee take possession of the bike at the end.

pdw

My company runs the cycle to work scheme to allow there employees to buy a bike out right, as long as you stay employed for the 12 months ( and make the agreed payments) my company considers the bike the property of the employee that was making the payments, I personaly consider any other way of looking at the cycle to work scheme as totaly unfair.

The employee makes all the payments, the goverment allows the tax to be relived in luu of payment approx 40% of the price, surley the employee gets the bike at the end.

Unfortunately, what you describe it outside the rules on a number of fronts, and so doesn't qualify for the tax break:

* The tax break only applies to "making a bike available" to an employee. This includes renting a bike to an employee, but not selling a bike to an employee. The latter is why there is such a fuss about fair values for the final transfer.

* If the company guarantees transfer of ownership, then you can't use the group credit licence exemption for the rental of the bike.

* If there's no final fee, then you need to pay tax on the FMV of the bike that you didn't pay.

You may view this as unfair, but the rules are what they are, and there is a reason why schemes go through the contortions of a rental, and then a non-guaranteed final transfer.

Of course, your company's scheme may not be exactly as you describe. If there is no formal guarantee that ownership will be transferred, and you declare the final transfer as a taxable benefit, then the scheme could be legitimate.

tomb353

My view on this is that the solution proposed by these scheme providers is a con. A fairer version of their solutiuon would be that the hire fees in the first 12 months should be reduced to reflect the fact that not all of the value of the bike is being wiped out. The idea that the cost of the inland revenue changes has to fall on the employee hiring the bike is not in line with the spirit of the scheme.

I've got several cycle to work bikes and have never had any correspondance from either employer or cyclescheme when the 12 month period has ended. If I did get any I'd suspect that ignoring it might well be quite an effective way of dealing with the situation. Whether I actually own any of my bikes I'm not quite sure, and don't really care possesion being 9/10ths.... Possibly the reason I don't get anything is that my employer is not selling the bikes to cyclescheme and is adopting the position that they are still on hire to employees for a peppercorn rent (which may be the best way to administer this).

whitestar1

tomb353 I think I understand the scheme now and still find it hard to sallow. Like you I cant see why the 12 month deduction isn't towards the bike cost. Actual rental in all fairness would be cheaper. I tried to convince some mates today and they cant see how its fair. Even when I explained the NI and tax deduction. If they hadnt change the FMV from 5% to 25% that too would sell the scheme. It ain't right!

pdw

whitestar1 wrote:

tomb353 I think I understand the scheme now and still find it hard to sallow. Like you I cant see why the 12 month deduction isn't towards the bike cost.

Because if it was, you wouldn't be within the rules, and so couldn't claim the tax break. Like it or not, that's how it needs to be if you want to avoid paying tax on the payments.

Actual rental in all fairness would be cheaper. I tried to convince some mates today and they cant see how its fair.

I'm not sure if "fairness" is relevant. Either it's a good deal, or it's not. Our company scheme represents a very good deal, if you end up buying the bike, and it doesn't cost the company anything other than a small amount of administration. Other schemes may not be a good deal, in which case don't participate in it, and suggest that your employer implements a better scheme.

Even when I explained the NI and tax deduction. If they hadnt change the FMV from 5% to 25% that too would sell the scheme. It ain't right!

FMV didn't change from 5% to 25%. HMRC made it clear what their expectation of FMV was, in the face of many people transfering bikes for something blatantly less than FMV. People who were midway through a scheme that was (unreasonably) expecting to be able to transfer the bike for a nominal fee got screwed.

optimisticbiker

i am well confused about how my current scheme works.... when I bought my first C2W bike in 2007 it was salary sacrifice and i paid £53.33/mo for a £1000 voucher, so £640 and i saved 40% tax and NI, roughly £326 so my £1000 voucher cost me, i think, £314?

This time round its being done as a loan not a salary sacrifice, I'm paying £69.44/mo so £833 for my £1000 voucher. Still a saving £170 (20%) but no tax or NI deduction

andrewlwood

I'm sure the govt got worried about a market being flooded with second hand bikes that were being sold at a profit, so started to get a bit more interested in the final pay-to-own amount.

My employer interpreted the rules at the start of the scheme as 'you can pay a 19th month payment to keep the bike', and a year later the govt released 'clarification' that payment should be a minimum of 25% of the bike's value. That takes me from saving about £400 on the bike to saving about £150, and it simply isn't worth it for me. I recently changed employer, so would have to purchase the bike to continue to use it, rather than extending the hire period.

I bought a new bike at the weekend - because once I've paid £250 to own the bike, and then replaced a bunch of bits and had a post-winter stripdown and rebuild, I'm going to have spent nearly £500 on the bike. I took that money and put it towards a new interest-free Trek 2.3 at Evans of all places. At least I know it's MY bike from the start. Also came with the groupset I wanted, and I got to try before I bought, and I didn't need to wait for two months to get it.

Quite what my employer is going to do with a 2-yr old Cannondale is beyond me - but it's not my problem. I suspect that it will sit in the company bike shed indefinitely, benefiting noone.

bails87

andrewlwood wrote:

I'm sure the govt got worried about a market being flooded with second hand bikes that were being sold at a profit, so started to get a bit more interested in the final pay-to-own amount.

I doubt they cared in the slightest about the 2nd hand bike market.

They just knew that the rules weren't being followed so they reminded people that you should be (and always should have been) paying a fair market value at the end of the scheme.

andrewlwood

Then it makes no sense. You're not really getting tax-relief on a bike, because at some point you need to buy it (it doesn't belong to you, even though you in effect pay the tax-free price)...
And companies are going to end up with a bunch of second hand bikes lying around that they can't do anything with.

Initially, the scheme looked appealing - in its current form, it really isn't that attractive, and the hassle and hoops to jump through just aren't worth it, esp with interest free credit around.

sketchley

At the end of the scheme HMRC want to stop you selling this bike for more than FMV and effectively getting a tax free income so they insist you must either buy the bike at FMV from you employer (after tax) or pay tax on the fair market value. This has not changed, all that has changed is that HMRC have issued guidelines on how FMV is calculated. The previous 5% was suggest by scheme runners as the FMV after a bike has been used for commuting 15miles per day every day if you do this you may still be able to claim FMV is less.

Now you could argue at end of scheme that the bike is worth anything from £0 upwards. HMRC have "clarified" that if this is worked out as per there new table they will not require proof. If you try and state FMV is anything else then you need to back it up (photos etc).

For those on one year schemes that have changed this seems a little harsh if you weere expecting 5% but you do have four options to choose from if your scheme admin will let you;

1. Get the remain repayments reduced by the amount of the FMV so your employer only recovers what they have paid. Note you will pay a little more than you expected due to tax and vat on the final payment.

2. Extend the hire period for a number of years with £0 payment per month until the bike's FMV reduces to a respectable amount. If you're are planning on continuing riding the bike to work this is a good option to take.

3. Ask you employer to transfer the bike to you for £0 as they already have all their money then pay tax on the FMV*. A £1000 bike has a 25% FMV after one year or £250 tax on this @ 40% is £100 @ 20% it's only £50.

4. Ask you employer to transfer the bike to you for what you think is FMV and then take pictures etc in case HMRC want proof. Taking this option is only really worth it you have ridden the bike a lot.

* to do this your employer need to fill out a P11D form which maybe too much agro for them.

pdw

andrewlwood wrote:

Then it makes no sense. You're not really getting tax-relief on a bike, because at some point you need to buy it (it doesn't belong to you, even though you in effect pay the tax-free price)...

If you go and look at what the tax break was actually about, it was about making bikes available to employees. Not about allowing employees to acquire bikes cheaply.

This could mean the company providing a pool of bikes which employees use freely - a benefit which would otherwise be taxable.

In practice, the only way that anyone takes advantage of the scheme is through the hire-then-buy arrangement, with only the hire part being tax free.

Initially, the scheme looked appealing - in its current form, it really isn't that attractive, and the hassle and hoops to jump through just aren't worth it, esp with interest free credit around.

The scheme has not changed.

Implementations of the scheme which were outside the rules have been clamped down on. Some implementations offer a better deal than others.

I expect to pay less than £500 for the £1k bike (and that's £1k at discounted prices) that I use for my daily commute. Sounds worth it to me.

andrewlwood

pdw wrote:

andrewlwood wrote:

Then it makes no sense. You're not really getting tax-relief on a bike, because at some point you need to buy it (it doesn't belong to you, even though you in effect pay the tax-free price)...

If you go and look at what the tax break was actually about, it was about making bikes available to employees. Not about allowing employees to acquire bikes cheaply.

This could mean the company providing a pool of bikes which employees use freely - a benefit which would otherwise be taxable.

In practice, the only way that anyone takes advantage of the scheme is through the hire-then-buy arrangement, with only the hire part being tax free.

Initially, the scheme looked appealing - in its current form, it really isn't that attractive, and the hassle and hoops to jump through just aren't worth it, esp with interest free credit around.

The scheme has not changed.

Implementations of the scheme which were outside the rules have been clamped down on. Some implementations offer a better deal than others.

I expect to pay less than £500 for the £1k bike (and that's £1k at discounted prices) that I use for my daily commute. Sounds worth it to me.

I know that the scheme hasn't changed at the government end - in reality, the fault lies with my employer for not following the rules properly initially (though they swear that they were given new information a year in) - but I also know the same issue occurred in other companies, and the deal as originally presented was amended to something far less favourable. If it had been a rent-for-as-long-as-you-work-here scheme, I would have thought twice about entering into it - as it is, knowing that I was going to leave within two years, it was not really worth me using the scheme.

whitestar1

I agree with you andrewlwood they treated you unfairly. Did you have the initial agreement in writing? If so, wouldn't that hold up in court? If the company was treated in that way they would be suing left right and centre!