Cycle to Work scheme survives taxman’s meddling

Cycle to Work has survived the taxman’s decision last year that the scheme allowing employees to buy cheap bikes for commuting was too generous.

Cycle to Work is a salary sacrifice scheme that was originally launched to allow tax payers a discount of up to 50% on a bike’s retail price.

In everything but name the scheme is a generous hire purchase agreement, but under the terms of the agreement, employees “hire” a bicycle from their employers for a sum taken from their salary before tax each month. At the end of the hire scheme, which usually lasts 12 months, the bikes are offered to the employee for a nominal fee, which up until last year was usually five per cent of its retail value.

Her Majesty’s Revenue and Customs last year issued new guidance that bikes worth up to £500 new will be worth 18% of that price one year on, 16% after 18 months, 13% after two years and almost nothing after five. Bikes costing over £500 will be worth 25% of their retail value after one year.

The new rules appeared to reduce the attractiveness of the scheme and applied retrospectively as well as to bikes bought in the future, but less than a year after the new guidelines were issued it appears the scheme remains popular. Crucially, on closer inspection, the revised rules on how much an employer is required to sell the bike for at the end of the scheme allows for discounts beyond the depreciation guidelines – signs of ‘wear and tear’ or ‘damage’ are sufficient to reduce the bike’s value.

A spokesperson for the Environmental Transport Association (ETA) said: “It was disheartening last year to see the taxman back-pedalling on the Cycle to Work scheme – if it was a tax loophole, it’s one that more than paid for itself through the financial and environmental benefits of more people cycling. If anything, cycling deserves more tax incentives such as exemption from VAT.”

Insurance for Cycle to Work

The government requires that all bicycles on the scheme must be insured against theft or damage. This is because if a bike is not insured and gets stolen or damaged during the hire period, the employee will have to pay back the value of the bike to their employer and will not receive the tax benefits of the scheme.