Lambert Chapman LLP's Chris Harman and Richard Thomson look at the taxation of company bicycles

In a bid to encourage alternative means of transport, the Government introduced a taxation exemption for qualifying expenditure on the provision of cycles and cycling equipment to employees.  This is usually referred to as the 'Cycle to work scheme'.

Under the rules, the employee is not charged income tax on the benefit on the provision of the item by the employer.

To qualify, the cycle or equipment has to be:

• Available generally to the employees.
• The employee uses the cycle or equipment mainly (more than 50% of its use) for ‘qualifying journeys’.

A journey only counts as a ‘qualifying journey’ in two situations:

• If all or part of the journey is between home and the workplace.
• If all or part of the journey is between workplaces.

Tax Deductions for the Employer

The employer purchasing the qualifying cycle and safety equipment should, in most cases, be able to claim tax relief for the employer through the Capital Allowances regime.

Many small businesses will qualify for full tax relief in the year of purchase through the Annual Investment Allowance (AIA). Other businesses will obtain tax relief on an ongoing basis through their claim for annual writing down allowance (WDA).

If the cycle or equipment is leased, generally the leasing costs will be tax deductable.

The VAT on the purchase can be reclaimed, subject to the usual rules on VAT recovery.

The cost of maintenance, storage and parking of a qualifying company bicycle receives tax relief by the employer and is not taxable on the employee.

Example 1.

Example 1. shows the cost of purchasing a qualifying bicycle by a company, that is entitled to AIA on the purchase, which pays Corporation Tax at the marginal rate of 21%.

The actual cost of acquiring a bicycle with a gross retail price of £1,117.50 to the company is £790.00.

Salary Sacrifice Schemes

An employer may want to recover the cost of providing the asset to the employee. A salary sacrifice scheme is when the employee accepts a lower salary in return for the employer providing a non-cash benefit.

As an exempt benefit, the employer will not have to pay any National Insurance Contributions (currently 12.8%) on the provision of the qualifying bicycle or equipment to an employee.

The employee will not have to pay Income Tax or National Insurance when being provided with the qualifying equipment.

The salary sacrifice allows the cost of the bicycle to effectively be reimbursed to the employer, whilst saving National Insurance costs.

The employee is able to obtain use of the bicycle with payment being made out of their gross salary.

Example 2.

Following on from Example 1. further savings will be achieved for the employer if a salary sacrifice scheme is introduced for the provision of the bicycle costing £1,000 net of VAT.

If a salary sacrifice scheme is used to loan the employee the qualifying equipment over 36 months, the employee could sacrifice £6.41 per week from their gross salary.

Net of tax and National Insurance for a basic rate tax payer, this would have a cost of £4.42 per week for the employee.

The employer will save National Insurance costs on the salary sacrificed. Throughout the period of ownership of the bicycle, the employer will save £128.

In these circumstances, the company is effectively being reimbursed by the employee for the cost of the bicycle. The company is able to achieve additional savings due to the reduction in the employer’s National Insurance becoming due with the result that an overall saving of £101 (after Corporation Tax relief of £26.88 (£128 @ 21%)) is achieved.

The company is financially better off if it provides the bicycle through the salary sacrifice scheme than if it does not offer the benefit at all to the employee.

Cycle to Work Days

In order to encourage staff to cycle to work, an employer can organise a ‘cycle to work day’ at which a free breakfast is provided to those taking part. The provision of a free breakfast would normally be treated as a benefit in kind but an exemption exists for a 'Cycle to work day' to allow the provision to be tax free.

Using a Cycle for Work Journeys

Employee Owned Cycles

If the employee chooses to use their own privately owned and privately maintained cycle for business journeys, they will be able to claim a mileage rate of 20p per business mile under the statutory mileage rates.

This is not available unless the bicycle is privately owned.

These schemes are currently extremely popular with a number of major employers such as the BBC, coca-Cola and Rolls Royce. If you need more information on this type of scheme please give Chris or Richard a call on 01376 326266.

Date:12 January 2010

  Mail this article to a friend