On your bike – but by the rules
Cycling is a popular pastime, so the Cycle to Work scheme allowing employers to provide their employees with tax-free bicycles is enjoying widespread favour. Unfortunately, some employers are not operating the scheme quite as HM Revenue & Customs (HMRC) intended.
The Cycle to Work scheme enables employers to buy or hire bicycles to lend to their employees for a defined period. The use of a bike is a tax-free benefit. Some employers want to recover the cost of providing a bike and may consider offering the scheme only to employees who are prepared to give up part of their salary through a salary sacrifice arrangement.
One of the key conditions of the Cycle to Work scheme is that it must be available to all employees, and this condition may not be met if the scheme cannot be used by certain low paid employees. Such employees cannot by law have their pay reduced to below the national minimum wage rate.
The second mutation of the scheme is when the employee buys the bike from the employer at the end of the loan period – this is quite a common arrangement. However, HMRC believes that where there is an automatic transfer of the bike to the employee at the end of the loan period, the conditions for the Cycle to Work scheme do not apply and no exemption is therefore available.
A further problem is how to establish the market value of a cycle at the time it is sold to an employee. If the employee pays the employer less than market value for the bike, the difference between the amount paid and the full value will be taxed and subject to national insurance.
HMRC has now provided guidance on the valuation of second-hand bikes based on the age of a bike and its original cost. Remember, bikes provided under the Cycle to Work scheme are only tax-free if they are used mainly by employees for commuting and work-related business.