HMRC has revised its ‘fair market value’ guidance for the worth of bicycles bought on the salary sacrificing Cycle to Work Scheme.
Bikes bought on the scheme by employees are, in effect, leased from employers until the final payment. Under the new HMRC rules, this final payment – worked out on the second-hand worth of the bicycle – is now higher than previously. The cost savings of the Cycle to Work scheme could now be negligible, perhaps negating the benefits of using the scheme?
The Cycle to Work Alliance, a new lobbying group set up by Halfords, Evans Cycles and Cyclescheme, is urging the HMRC to re-think Monday’s rule revision.
A statement from the group said: "HMRC’s transfer of ownership matrix…will simplify the administrative burden for employers who implement the Cycle to Work scheme. However, the Alliance is concerned that it may erode the scheme. The matrix could make it too expensive to purchase the bike after the hire period."
The Cycle to Work Alliance is operated by Westminster Advisers, a "public affairs and corporate comms consultancy" which clients use to communicate "effectively with politicians, stakeholders, campaign groups and the media." It was formed earlier in the summer and held a launch reception in the House of Commons at the end of July. The launch was hosted by Chris Boardman.
On Monday, despite lobbying efforts by the Cycle to Work Alliance, Her Majesty’s Customs and Excise released a number of interlinked statements redefining the terms of final ownership of bikes bought on the scheme. Even though the new guidance is described by HMRC as a "simplified approach to valuing cycles sold to employees after end of loan period" the language used on the HMRC statements and policy revisions are cloaked in accountancy-style legalese.
A box on one of the statements is eye-wateringly scary for bike shops reliant on Cycle to Work business. The ‘acceptable disposal value percentage’ of a £500+ bicycle bought on the scheme by an employer and transferred to the ownership of an employee a year later will now be 25 percent.
A bike shop selling high-quality Dutch bikes has calculated that a typical customer of his would now make a grand saving of £19.
The scheme has so far sold itself on savings of up to 50 percent of the price of a new bike, with the final resale value being as low as 5 percent.
One of the biggest users of the Cycle to Work scheme – via third-party facilitator Cyclescheme – has been Rolls Royce. Earlier in the year HMRC started looking closely at the operation of the Rolls Royce scheme and it’s believed Monday’s rule revision is based on the Rolls Royce investigations.
HMRC has long had concerns that bikes bought on the Cycle to Work Scheme were being giving unrealistic market valuations when ownership of the bikes was transferred to employees.
Two months ago, Richard Grigsby of Cyclescheme said:
"For the last five years Cyclescheme has been burdened with ‘what happens at the end of the hire period’ questions. This is because HMRC have, until recently, stated that bikes sold onto employees should be charged at a ‘fair market value’. Last September saw the several key aspects of the scheme clarified by tighter HMRC guidelines but these new guidelines only touched on the end of scheme transfer of ownership.
"Until now Cyclescheme has circumvented expert assessments fearing added complexity will put off some employers/employees. An on-line self assessment, completed by the employee, is our preferred route – much along the same lines as an individual completes a self assessed tax form except, to put this into perspective, this is purely for a second-hand bike.
"The Rolls Royce situation evolved via extremely lengthy negotiations with them, the HMRC and us and is borne from a scheme so large that the authorities are bound to take an interest.
"Overall savings may be affected by the new procedures, and employees may feel penalised for having looked after the bike but the scheme still represents an excellent way to use a quality bike package. The HMRC does expect values to err on the low side and our mechanisms reflect this practical interpretation."
However, HMRC is now not erring on low valuations, nor does it take into account heavy and prolonged use of bikes.
Richard Grigsby and Gary Cooper sold Cyclescheme to the Grass Roots Group in March.
Grigsby and Cooper stayed on as advisors.
The official spokesperson for the Cycle to Work Alliance is Marc Woolfson of Westminster Advisors.
Complaining about the scheme’s potential scuppering, Woolfson said:
“The Cycle to Work scheme demands ongoing support and should not be eroded, it is the glue that helps Government deliver its agenda on health and sustainable travel. The Department for Transport and HMRC must work in unison to make the scheme economically attractive to participants.”
A statement from the Cycle to Work Alliance said: "The Alliance is concerned that HMRC’s matrix is undermining the scheme and the Government’s agenda on sustainable transport, health and employee engagement.
"The matrix does take into account the age of the bicycle, however it doesn’t consider its condition. This risks undermining the economic competitiveness of the scheme as would unfairly penalise users, forcing them to pay an artificially inflated price for their bike at the end of the hire period.
"The Alliance is worried therefore the scheme may seem less attractive, reducing take up, and hampering delivery of the Government’s priorities on the low carbon economy and on active living."
While consumers may now find the new HMRC rules make the Cycle to Work scheme less financially attractive, it could be make or break for bike shops heavily reliant on the scheme.
Privately, many have voiced deep concerns about the rule change. For many bike shops, Cycle to Work scheme custom makes up 25 percent of their annual turnover. For a small number of shops, it accounts for 75 percent of their custom.
However, not all bike shops think the scheme is dead in the water.
One said: "From my reading of [HMRC’s rule change] the employer can sell the bike to the employee for whatever they like, ie £5. However the difference between the amount that the employee pays for the bike and HMRC’s valuation of the bike would become a benefit in kind and therefore taxable.
"So £1000 bike (£850 ex vat): HMRC’s valuation £250
"Employee pays £5 for the bike, and Tax/NI on £245 (£54 Tax + £25NI) So in effect pays a final payment of £84.
"This is still a massive saving."
CTC Senior Technical Officer Chris Juden agrees there are still significant savings to be made:
"All that’s happened is that where an employee might previously have made savings on 95 percent of the bike’s value, one can now make the same savings on ‘only’ 75 percent of it. So the total savings, per bike, reduce to 79 percent of their former magnitude.
"Here’s my maths. The total savings comprise: (1) VAT at 17.5 percent on the price of a bike minus its residual value. What’s left is the cost of the bike to the employer, on which can be reclaimed through salary sacrifice: (2) Income tax at 20 percent, (3) employee National Insurance at 11 percent, and (4) employer’s NI at 12.8 percent. Taking a residual value of 5 percent those four factors combine to provide a total saving of 51 percent, or 41 percent if the employer trousers NI savings to offset administration costs. If the residual value must instead be 25 percent, these savings fall to 43 percent or 34 percent respectively. Not as high, but still very worthwhile.
"Nobody really thinks a bike is worth only 5 percent of its purchase price after one year’s riding to work. Even 25 percent is a steal, so I think we should be glad that HMRC have swept away a great big area of uncertainty that was putting off quite a lot of employers from getting into the scheme in the first place."