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Golden days of ‘bike to work’ scheme could end in 2012

By RJP LLP on 30 August, 2011

New guidance issued by HMRC suggest it will soon become more expensive for workers to buy a bike through the cycle to work scheme and so less attractive.Currently the scheme operates as follows....

Employers (or a scheme provider) technically purchase a bike chosen by the employee, which is then rented to them for a set period (usually a year or 18 months). After this time, the worker buys the bike outright at the second hand value.

The bike to work scheme is financially beneficial at a number of levels

1. The employer/scheme provider does not have to pay VAT on the original bike purchase.
2. Rental payments to the employer are classed as salary sacrifice and exempt from tax and national insurance.
3. The employer or scheme provider independently assigns a residual value to the bike, which is then paid by the employee in order to own the bike outright.

Due to recent changes, these benefits may no longer exist, meaning the scheme is no longer as attractive to taxpayers. This is for a number of reasons.

Firstly, HMRC has now issued a table of values for second-hand bikes, which in many cases lists the residual value as being a lot higher than the sums previously being paid by employees for their bikes. It was not uncommon for an employer or scheme provider to assign a value as low as five percent of the original price, allowing an overall saving of up to 50% of the bike’s purchase cost, depending on the worker's tax band.

HMRC’s second hand bike valuation table (as disposal % value)

Age of cycle               % Disposal value – bikes costing < £500               % Disposal value – bikes costing > £500
1 year old                                                            18%                                                                                                     25%
18 months                                                          16%                                                                                                     21%
2 years                                                                 13%                                                                                                     17%

Secondly, whereas currently the price paid by the employee for the bike is net of VAT from 1 January 2011 the employer will have to deduct the amount including VAT.

It is a shame such schemes are being put under pressure through increasing costs as many clients implemented the programme to help employees become more active and healthy. In the end, depending on the tax level of the employee, the benefits may still be worthwhile to pursue. Alternatively, more people will be looking to purchase bikes in the sales, or directly from shops second hand.

To find out more about tax free perks for employees contact Paul Webb at Surrey accountants RJP, at pw@rjp.co.uk.

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