HMRC Update

Simplified approach to valuing cycles sold to employees after end of loan period.

Cycle Solutions can help with all aspects of your cycle to work scheme. We have been working with tax specialists and consultants to develop solutions for all employers and employees using our cycle to work scheme.

If you need any help or advice, please contact us on 0845 2799970 or email info@cyclesolutions.co.uk.

Background

On 6th August 2010 HM Revenue & Customs (HMRC) issued new guidance in relation to the cycle to work scheme (EIM21667a).

The aim of the guidance is to clarify what HMRC considers to be the ‘Fair Market Value’ of bikes if ownership is transferred to an employee at the end of a cycle to work scheme loan period.

Under the rules of the scheme, there can be no guaranteed right for employees to take ownership when they have completed the rental period that they sign up to. However, most employers have taken a pragmatic approach by offering their employees the opportunity to either buy their bike when all costs have been covered, or to continue to use the equipment on an on-going basis, for no further financial consideration.

Since the inception of the cycle to work scheme, and subsequent publication of HMRC and Department for Transport guidance for employers in June 2005, there has not been a clear definition of what HMRC believe to be a ‘fair market value’ charge. The new guidance changes this by providing a fair market evaluation matrix. This takes away much of the ambiguity that has surrounded the calculation of the ‘fair market value’.

However, it is important to note that use of the matrix is not the only option available to employers and employees. As it says on the Directgov website;

“At the end of the loan, your employer may give you the opportunity to buy the bike for its full market value, if you wish. Or, you may be able to continue loaning the bike at no cost - as long as you still use it for qualifying journeys.”

What information did HM Revenue & Customs use to get the matrix values?

This is unclear. We understand that several leading firms of accountants were consulted for their opinions on this subject. However, the high percentages shown on the matrix, particularly for cycle packages with values in excess of £500, were not discussed during the consultation process. It is also unclear what criteria were used by HMRC to determine that bicycles with values in excess of £500 are assumed to depreciate more slowly than less expensive bicycles.

As a member of the Cycle to Work Alliance, Cycle Solutions is seeking clarification from HMRC on this issue.

So what does the publication of the HMRC Valuation Table mean to you and your cycle to work scheme?

The cycle to work scheme itself remains unaffected by the new guidance. It has always been the case that the cycle to work scheme gives employers the chance to loan a cycle to their employees so that they can take advantage of the tax and national insurance savings.

The savings available through the scheme remain unchanged and by using Cycle Solutions, employees can currently use equipment with a saving of up to 54.8%¹ compared to the price they would pay to buy the equipment on the high street.

All that has changed is that HM Revenue & Customs has confirmed that if the employee buys the equipment when they have finished paying their rentals, then in order to avoid a benefit in kind, the value charged should be in line with the valuation table unless employers wish to use a lower value and can evidence to HMRC’s satisfaction that this represents the fair market value of the equipment.

However, you don’t need to buy the equipment. Employers are free to offer their employees the opportunity to continue to use the equipment indefinitely without further charge. All that employees need to do is continue to use the bike for predominantly work related journeys. So essentially, from the employees perspective as long as they continue to conform with the initial agreement, they can use the bike for nothing!

Furthermore, after five or six years, HMRC view the value of the bike as being negligible.

What if I want to buy the bike or leave my employer?

Currently most employers give their employees the opportunity to buy the bike at the end of the loan period, which is typically either 12- or 18-months. However, there is no requirement for the equipment to be sold in this way. Indeed, the most cost effective way to operate a scheme has always been for employees to be able to continue to use the cycle and equipment for no extra cost when all of the rental payments have been made.

However, there will be occasions when an employee wants to buy the bike. Perhaps they would like to get a new cycle and equipment package through the scheme, or they are leaving their current job for pastures new. In such circumstances it has always been the case that the employee would need to pay the fair market value for the equipment (including VAT) before the title (or ownership) could be transferred to them.

Historically some scheme providers have used a value of 5% of the retail price as a benchmark for calculating the fair market value. Cycle Solutions has always taken the view that any calculation of fair market value should reflect the age and condition of the cycle and equipment.

Reassuringly, HMRC has indicated that the ‘fair market price valuation table’ should only be used in calculating the price for cycles and safety equipment fitted to the cycle (such as lights and mudguards).

Cycle Solutions will provide full assistance and administrative support to employers who wish to use the matrix to calculate the amount that employees should pay to take ownership of their equipment. We can split out the costs associated with non-cycle mounted equipment like reflective clothing and helmets to keep the cost of purchase to a minimum.

What will happen if the valuation table is not used to calculate fair market value?

HMRC has confirmed that where an employer uses the simplified valuation table they will accept that the valuations are correct for ascertaining the employment income position.

If employers chose to use lower values, it would remain open to HMRC to challenge these and the employer or employee would need to be able to provide evidence in support of the values used. In other words, they would need to demonstrate that the employee could have realised no more than the sum paid from sale or disposal of the cycle.

Where this is the case, HMRC would expect to see:

• A photograph of the cycle demonstrating its condition along with a description of any important aspects of its condition that are not evident from photographic evidence,
• Broad details of the extent of usage of the cycle (which can vary considerably even between cycles that meet the “qualifying journeys” main use condition for exemption), and
• Contemporaneous evidence of the amount for which that type of cycle in that sort of condition would have realised in a private sale and in a sale to a cycle retailer.²

Cycle Solutions is able to assist any employee or employer who wishes to evaluate a cycle in this way. This is a service which is available to all of our clients and is free of charge. Our wide experience developed over 28 years in the cycle industry, combined with our market leading position as a provider of cycle validation services for the UK insurance industry, places us in a unique position to be able to evaluate cycles in this way.

However, it is not possible to guarantee that HMRC will accept any evaluation of less than the applicable value from HMRC’s own valuation table. If HMRC feel that the market value charged to the employee cannot be justified and should have been higher, then they will determine that the transfer may be taxable either as earnings within section 62 ITEPA 2003 or as a benefit in kind.

In such circumstances HMRC will use the table values to calculate the amount of any reportable earnings or benefit. They will, in effect, subtract the amount paid by the employee from the value obtained from HMRC’s valuation table to determine the amount they will view as a taxable, non-cash benefit. Tax would then be liable for payment by the employee on this value and there would be an NIC charge on the employer.

What happens when an employer has used third-party finance to fund the cost of bicycles and equipment?

The same rules apply. However, in such circumstances the employer will have no involvement in the sale of the equipment at the end of the rental period.

The lease provider will contact each employee shortly before the end of the rental period. They will make arrangements for the loaned equipment to be collected. Alternatively, they may at this stage be able to make arrangements for the employee to arrange to purchase the bicycle for a fair market value paid to the finance company.

Our finance partners have supplied tens of thousands of bicycle packages in this way and are expects in establishing the second hand value of such equipment.

By funding a scheme using third party finance, essentially once all rental payments have been made, the employer will have no further involvement with the scheme [other than to ensure that the equipment continues to be predominantly used for commuting to/from work].

I have more questions, what can I do?

We are here to help.

If you or your organisation require further guidance to assist in the management of your existing cycle to work scheme, or if you would like to start a new cycle to work scheme, please get in touch.

Contact Us

Telephone - 0845 2799970 (Option 2)

Email - info@cyclesolutions.co.uk

1. Actual savings are dependant upon the nature of the employing organisation and the personal financial circumstances of employees. Savings of up to 54.8% have been made by employees of some of our largest clients who pay income tax at the higher-rate.
2. Text taken from HMRC publication EIM21667a.