Drat! Someone At HMRC Recently Sold Their Bike!

Remember the Cycle to Work Scheme ? The one where you could get a brand new bike, and get your employer to pay for it up front (thus avoiding VAT), and you pay them back on a monthly basis from your pre-tax earnings, and then at the end of a year, pay a final "fair market value" of about 5% of the original purchase price to claim full ownership of your steed?

The above probably looks very complicated, but trust me, it was a great way to get yourself a nice new bike at around 50-55% of it’s shop price.

Well it looks like someone working at HMRC has recently sold their bike. Or maybe they’ve gone out to buy a second hand bike. Whatever - they’ve realised that the fair market value of a bike outside of the BSO (bicycle shaped object) category is more than 5% of it’s purchase price after 12 months. So now they’ve clarified (i.e. changed) the rules, as explained in HMRC’s EIM21667a - Particular Benefits: Bicycles: simplified approach to valuing cycles sold to employees after end of loan period .

Whoever wrote this is either well versed in doublethink or has a great sense of humour by calling it "simplified ". Let me give you a flavour:

As explained in EIM21664 , employers commonly choose to provide the benefit of a loaned cycle in conjunction with salary sacrifice arrangements. It is common for cycles provided under salary sacrifice arrangements to be sold or transferred to employees after the end of a period of loan. The exemption for certain loaned cycles will be prevented from applying if any agreement builds in from the outset an automatic transfer of ownership to the employee at the end of a loan or hire period (see EIM21667 ). However, where this is not the case, there is no contradiction in an earlier exempt loan being followed by a decision by the employee to buy the cycle.

If a cycle is transferred to an employee after a period of use as a benefit during which the exemption described in EIM21664 applied, the transfer may be taxable either as earnings within section 62 ITEPA 2003 or as a benefit (see EIM21667 ).

In either case, as long as any payment that the employee makes for the cycle is equal to or more than the market value, there will be no tax charge under the employment income rules. If the employee pays less than market value, the difference will be taxable as employment income.

All the words are English, the sentences are correctly structured, but my eyes glazed over before I’d got to the end of the first paragraph.

The important bit comes a little further down, with the valuation table:

Sadly, these are probably realistic valuations for second-hand bikes, so it means you can kiss goodbye to that nominal 5% valuation on a 12 month-old bike. It gets worse though - these figures need VAT adding to them!

So under the original understanding of the scheme (5%) final valuation, in 12 months you could get yourself a bike that would cost £1,175 inc VAT (the most expensive allowed in the scheme), and only pay £590-690, depending on your earnings level - if you already earn more and pay higher rate income tax, you get a bigger reduction on the price you pay.

Under the new scheme, at the end of 12 months the final valuation will be

(VAT Free Purchase Price x 25%) + VAT

= (£1,000 x 25%) x 1.175 = £293.75

So you’d pay £833.75 in total if you’re a higher rate tax payer, or £933.75 if you’re on basic rate tax, making the effective tax seriously regressive. Let’s be clear though - this is still a saving of £241-£341 on the retail price of what’s probably a jolly nice bike. If it were offered to you as cash in your pocket, you’d grab it with both hands, wouldn’t you?

I see two problems with the new "simplified" final valuation calculation:

1. It looks like employers will be applying it retrospectively. So if you’ve just got a bike, you need to brace yourself for a bigger-than-expected final payment. Given the take-up of the scheme in the public sector (I’ve heard that 50% of employees in some councils are on it), there’s an additional incentive that those final payments go straight to the top line of their P&L. This makes a welcome boost to public sector income at a time when central government is putting the squeeze on. Maybe we should Christen EIM21667a as the "Bicycle Tax"?
2. If the purpose of the cycle-to-work scheme was to tempt people who don’t ride to get out of their cars and onto bikes that are actually fit for purpose, this change in the final valuation might just kill it. The scheme still means you get a bargain bike . . . but nothing like the bargain it once was. Over half the incentive to get out of that nice, air-conditioned, padded & cosseted 4×4, and onto a bike has vanished. If you want to change behaviour like that, you need as big a carrot as you can find.

Either way, this "simplification" means that riding a bike just got more expensive for anyone who was hoping that government policy would support them move toward green transport.

There is a potential silver lining in this though. At present, you can claim bicycle mileage in your tax return at 20p per mile. I’ve worked out that if you have a £1,175 bike, keep it for four years, ride 6 miles to work three times a week for 40 weeks of the year, and have it professionally serviced every year . . . it costs you 28p a mile. You only hit the Treasury’s 20p a mile if your bike costs less than £636.

So if HMRC think it’s reasonable to apply realistic figures to bike valuations under the Cycle to Work scheme, maybe it’s also reasonable for us to claim the true cost of running a bike in our tax returns.

Anyone willing to take this one up with them?

Filed under: Bike Culture

Tags: cycle to work scheme, doublethink, final valuation, HMRC, regressive tax policy, tax