Cycle to work scheme

Brilliant I'm thinking of buying a new track frame on the C2W scheme - might have to go have a chat with the LBS.

Folks, do check out the detailed HM Revenue and Customs guidance on the scheme.

http://www.hmrc.gov.uk/paye/exb/a-z/c/cyclists.htm

As in most things in tax, HMRC tend to let things go, get niggled when people use the loopholes, and then slam down the shutters when they feel it has gone too far.

Herewith a narrative explanation of the mechanics, with some example figures to help understand the scheme, and the practical issues which make it attractive to all employed cyclists.

Normally, as an employee, any assets made available to you by your employer, give rise to a taxable benefit in kind. Normally 20% of market value, special rules for cars, houses, and some other specific asset classes.

However, for cycles, and associated safety equipment, there is no benefit in kind.

Therefore, if your employer, out of the goodness of their heart, give you a bike, no nasty tax surprises through PAYE or at the end of the year, on a form P11D.

The twist is that your employer may not give you a bike for free, but rather offers to reduce your salary, in exchange for lending you a bike of equal value for the net salary forgone. You then see your salary go down not by the shop price of the bike, but a figure calculated after the tax relief received by your employer, and then less the income tax and NIC which you would normally pay on the salary forgone.

Under the old VAT rules, your employer would in most cases (not if a health trust, bank or insurance company) be able to get VAT relief on the cost to them of the bike, so a £1,000 bike would actuallly cost them an after VAT price of £833. If your employer is really, really nice, they will then discount the salary sacrifice further for the capital allowances tax relief they obtain for the "plant and equipment" they have bought for their business, say another 25% of the after VAT price, meaning that your gross pay cut could fall to a figure of say £625. Thus, after the tax and NIC deduction from your salary of say 35%, the effective cost to you is a year of being short £33.85 per month, and then the cost of buying the bike at the end of the hire term.

You then pottle around on the bike for a year or so and then your employer says "hey, want to buy a bike for a low price, as it is probably only worth scrap now" at which point you make a small contribution, and walk away with the bike, which is now your personal property.

HOWEVER, the VAT rule change means that your employer will effectively not be able to wash through the VAT saving to you. The most likely way of dealing with this, is for your salary sacrifice to be gross of VAT, rather than net, thus the reduced saving rate mentioned above.

Also, HMRC got the hump last year at Colnagos being sold for £150 at the end of the year, and there is now a formula for the minimum price at the end of term sale.

Always think through the implications of an end to employment, change in personal circumstances, offer of a better job elsewhere. What happens if the bike gets nicked, or you are involved in an accident with third party claims? Will the cycle to work scheme prove a real headache, in considering such matters.

Finally, make sure your purchase will stand up to scrutiny if HMRC come a'calling. A bike for your kids, a carbon frame that has never seen the office, and some exotic wheels with nothing else attached, are going to get you into trouble if a General Motors loving tax inspector is sent on your employers next PAYE compliance check.