You’ve probably heard about changes to the Cycle to Work scheme recently announced by HMRC (that’s the tax man) at the end of August. Mark Brown, our Cycle to Work scheme expert, gives us the lowdown on what’s happening and will answer any questions you have here on the blog.
Simply post your question in the comments section below and Mark will answer them!
Frequently asked questions about the new scheme
Q: Does this affect all cycle to work schemes?
A: Yes, it is applicable to any existing scheme where ownership of the bike has not yet transferred and any new scheme set-up since August.
Q: So what happens to people already in the scheme?
A: Our advice for existing schemes, where ownership has not yet been transferred, is to extend the hire agreement for a longer term, which means the cost of ownership becomes less and eventually is zero. Use of the bike continues as normal at no extra cost. Should an employee leave or request to take ownership at any time then the appropriate fair market valuation charge is calculated using the new table. Further details on this option can be found below.
Q: Am I likely to be any better off financially; or would it have been better off for me to have made a normal purchase? Will I lose money on a higher tax rate?
A: Participating in the scheme still offers significant savings which ensures you can be better off financially when compared with a normal purchase. If your employer extends the term of the loan period then you can expect to make the same kind of savings as before.
Q: So is it the value of the bike or the value of the loan?
A: We operate the scheme based on the value of the loan.
Q: If you have to pay back 25% fee at the end of the scheme, why do you have to pay rental on 100% of the price during the year? Surely you should only pay rental on 75%, and then you buy the bike with the remaining 25%.
A: This is a possible option however our experience has shown that most companies want 100% rental in order to cover their costs in year one. Ownership of the bike cannot be guaranteed at the start of the scheme, which is what this option suggests, and some employees may even choose not to keep the bike, therefore this method of structuring the payments is not seen as particularly attractive. We are happy to discuss this option with any employers who want to find out more.
Below we have asked Mark to give us the full detail on the new changes
Why were new guidelines announced in August?
Since the launch of the scheme there has been some confusion surrounding how much to charge for a bike when ownership is transferred from the employer to the employee, at the end of the loan period. There were never firm guidelines on what the value of this ownership payment should be, meaning what people paid to become the final owner of the bike varied dramatically.
As a form of employee benefit, and because the bike is owned by the employer, HMRC view the transfer of ownership as a transaction which has a taxable value and were keen to ensure it is fully compliant with current legislation.
We view these changes as a good thing because they help companies administer the scheme and therefore more likely to offer it to their staff. You can see the new valuation table here
How will the scheme change as a result?
At face value some people may think these changes make the scheme less attractive by removing some of the savings for employees. Actually the opposite is true.
An important point about the scheme is that the period of salary sacrifice, that’s the monthly payments bit, does not have to be the same length as the agreement to hire the bike.
This means that the bike loan payments can still be undertaken over 12 months, but hire and use of the bike can continue for a much longer period of time without any extra charge. At the end of this period the offer to transfer ownership of the bike to the employee can be made.
HMRC valuation guidance covers 12 to 72 months, at which point a bike has no value and ownership can be transferred for zero cost.
What are you recommending to Ride2Work customers?
Our advice is to offer a flexible hire agreement with a maximum term of 72 months. The salary sacrifice payments are taken in year one but use of the bike continues for free until such time as ownership is transferred, if an employee leaves the company, or at 72 months when the bike has no value and ownership has no cost.
Don’t be put off by talk of 72 months because this basically sets the framework for the Ride2Work hire agreement. The scheme is really flexible so ownership can be transferred at any time if either party requests it.
This is a great solution ensuring employers offer a compliant scheme which is easier to administer and employees can still take advantage of fantastic savings. In fact the savings can actually be greater because the longer the hire term the cheaper the bike becomes, ultimately having no cost.
Can you give us some examples of savings under the revised scheme?
Employee earning £20,000 spending £700 with a 72 month hire agreement:
Monthly cost to hire = £34.26
Ownership transfer cost = £0
Total cost = £411.06
Savings = 41%
Employee earning £45,000 spending £700 with a 72 month hire agreement:
Monthly cost to hire = £29.29
Ownership transfer cost = £0
Total cost = £351.49
Savings = 50%
Are there other options apart from extending the hire period?
There are other ways that employers can structure the valuation and transfer of ownership however in our view they create more paperwork and reduce the savings.
The first option involves self valuation, whereby employees have to do a fair amount of work to prove how much their bike is worth. The second option is to submit something called a P11d which is a way of paying tax on the value of the bike, which involves completing a self assessment tax form.
More details on these other options here
What should employers and their staff do if they have any more questions?
Use the comments section below to post your questions and we’ll respond directly!
If you prefer to talk to us call our Ride2Work helpline on 01293 572 325 or you can email us here!