Yet Another Cycle To Work Thread (Sorry)

Pross

I think I have finally cracked my employer into operating a cycle to work scheme and, in order to avoid the potential for getting a discount that the third party schemes suck out of bike shops but fail to pass on, I am looking at going down the route of the company buying directly. This will also open up the range of bikes for anyone who wants to take part. I need to put something together for my Directors explaining how it would work and just wanted to check with anyone who is already doing this that my own understanding is correct:-

1. The company buys a bike for the employee up to a cost of £1000 (to avoid becoming a hire purchase arrangement). The company can claim back the VAT so the cost to the employee will be £800.

2. The £800 is split over the agreed loan term so let's say 24 months at £33.33 per month. This monthly fee is sacrificed from the employees salary before tax hence the employee doesn't pay tax on that £33.33 each month saving themselves 20% or 40% on income tax and 10% or 2% on employees NI contributions and the net loss to the employee in take home pay is therefore reduced to c. £20 - £25.

3. (The bit I'm not quite sure on) The Employer also doesn't have to pay employers NI contributions on the sacrificed salary therefore saving additional money which can also be passed on to the employee but I'm not quite sure how this works?? Alternatively they may just keep the saving to themselves or even split the difference.

4. At the end of the loan period the employee may be offered the chance to buy the bike in which case (for a bike of over £500) the HMRC recommended price is 17% of the original value. The original value can be exclusive of VAT (so £800 in this example) but VAT would be added to the final payment value i.e. the price would be (£800 x 0.17) x 1.2 = £163.20. It is not permitted for the original agreement to state that the Company will offer the bike for purchase at the end of the scheme. The employer can sell it for less than the 17% value but if so the employee becomes liable to tax and NI on the difference between the two figures.

So on that example a £1000 bike would cost around £750 on, effectively, a 2 year interest free loan.

Can someone with experience of running a scheme confirm that the above is correct and also possibly clarify the point on whether the employee can benefit from the emplyers savings on NI contributions please?

Also, does anyone have a link to a decent template for a bike loan under the cycle to work scheme?

pdw

Pross wrote:

1. The company buys a bike for the employee up to a cost of £1000 (to avoid becoming a hire purchase arrangement). The company can claim back the VAT so the cost to the employee will be £800.

Not quite - see below.

2. The £800 is split over the agreed loan term so let's say 24 months at £33.33 per month. This monthly fee is sacrificed from the employees salary before tax hence the employee doesn't pay tax on that £33.33 each month saving themselves 20% or 40% on income tax and 10% or 2% on employees NI contributions and the net loss to the employee in take home pay is therefore reduced to c. £20 - £25.

Unfortunately you need to charge VAT on the employee's repayments. Also, I think there's some potential issue with operating a salary sacrifice for more than 18 months.

3. (The bit I'm not quite sure on) The Employer also doesn't have to pay employers NI contributions on the sacrificed salary therefore saving additional money which can also be passed on to the employee but I'm not quite sure how this works?? Alternatively they may just keep the saving to themselves or even split the difference.

Yes. There's no requirement for the hire payments to bear any relation to the cost of the equipment being hired. If the company wants to charge you £1/month, that's fine, but obviously it'll cost the company money. If you do the sums, you can make it so that it works out exactly neutral to the company, once you take into account employer's NI. Employers NI is 13.8% so it's worth doing this.

4. At the end of the loan period the employee may be offered the chance to buy the bike in which case (for a bike of over £500) the HMRC recommended price is 17% of the original value. The original value can be exclusive of VAT (so £800 in this example) but VAT would be added to the final payment value i.e. the price would be (£800 x 0.17) x 1.2 = £163.20. It is not permitted for the original agreement to state that the Company will offer the bike for purchase at the end of the scheme. The employer can sell it for less than the 17% value but if so the employee becomes liable to tax and NI on the difference between the two figures.

All correct but you're better off deferring the bike transfer. i.e. rent the bike for 18 months, allow the employee to use it free of charge for a further 18 months or more, and then transfer when HMRC consider the value to be much lower. As the company has recovered the full cost of the bike through the rental payments, there's no real reason not to delay, assuming the employee stays employed and wants to keep the bike.

So on that example a £1000 bike would cost around £750 on, effectively, a 2 year interest free loan.

Our scheme (run by me) would give you 12 months of £72.23 (inc VAT) from gross salary, or £49.79 from net (basic rate), delay for a further two years, then transfer for £17.05 (inc VAT). This gives rise to a taxable benefit of £102.95, on which a basic rate payer owes £32.95.

Total cost to employee £647.53.

The reason why the transfer fee isn't zero is to cover the employer's NIC on the benefit.

Also, does anyone have a link to a decent template for a bike loan under the cycle to work scheme?

I based ours on the ones from Wiggle, I think.

thefd

Is there a way it can be done so the employer doesn't lose out when they are VAT exempt? My business is VAT exempt so cannot claim the VAT back on the original purchase. I struggle to get my head round this one.

pdw

I assume that if they're VAT exempt, they also don't have to charge VAT on the employee repayments, so it works out pretty much the same. This wasn't the case in the past, as prior to Jan 2012, employers were not required to charge VAT on the repayments.

thefd

I'm more thinking of the purchasing the bike. If my company buys the bike (I'm the owner of the company) then I have to pay vat on it, but cannot claim it back. I cannot see any incentive for me to offer it to my staff (other than it being a good thing to do, and the green credentials etc) but in monetary terms I lose out by quite a lot....? If I'm wrong please explain.

Thanks

pdw

No, you don't lose anything. You buy the bike, your employee's rent it from you. The rent that you receive (via salary sacrifice) covers the cost of the bike. The staff save money because they pay for the bike out of pre-tax earnings, not post tax.

For a normal company, whilst they can reclaim the VAT on the original purchase they have to give the VAT charged on the repayments back to the VATman. In your case, you can't reclaim anything on the purchase, but equally, you don't have to charge any VAT on the repayments.

The real saving on the scheme is through avoiding some Income Tax and NI. You used to be able to save VAT too, but as I said, that benefit is now gone, so you're in the same boat as everyone else.

Pross

Thanks PDW. What is the issue you believe there may be with hire going over 18 months? I couldn't see anything on HMRC and their 'buy back' table covers more than 2 years. Is this a credit licence issue like the £1000 maximum price thing? Do you find it quite easy to run the scheme?

pdw

It's a conflict with with the CCA. Taken from some random website:

Under the Consumer Credit Act, 1974, all hire agreements may be unilaterally cancelled by the hirer after 18 months. This creates a potential conflict with salary sacrifice because an employee that may elect to terminate a hire agreement after 18 months can effectively return to their previous salary at a time of their choosing and thus render salary sacrifice ineffective. This also exposes the employer to the risk of not recovering the costs of providing the benefit.

I think that it would take a very sharp (and vindictive) tax inspector to pick up on that, but it's probably worth doing it by the book.

The buy back table goes beyond 2 years, because they accept that people will delay the transfer after the initial rental period.

The scheme is easy to run. I do get some moans from the accounting department, as the correct treatment of the bike purchase and the subsequent rental payments in our software is apparently a bit painful.

I have a spreadsheet that does the sums and generates all the necessary paperwork. I'd be happy to share it, but I need to clean a few things up first.

slowmart

Going the route of your employer supplying the bike means you will have to convince your company to apply for a credit license as essentially they are providing the loan to the employee.

That's how it was explained to me and that's where it fell down

Good luck!

pdw

Slowmart wrote:

Going the route of your employer supplying the bike means you will have to convince your company to apply for a credit license as essentially they are providing the loan to the employee.

That's how it was explained to me and that's where it fell down

That would be true, if it weren't for the fact that a key part of the cycle to work scheme is that the OfT have issued a group credit licence to all employers allowing them to rent up to £1k of bike + safety equipment to their employees. You can find a copy of the licence here:

http://www.oft.gov.uk/shared_oft/busine ... icence.pdf