What is the Wiggle Cycle to Work Scheme?

In order to encourage healthier lifestyles and to help reduce environmental pollution the UK Government has introduced Cycle to Work Schemes. In addition to the health and environmental benefits of these Schemes, these Schemes also provide financial benefits to both the employer and employees.

The Wiggle Cycle to Work Scheme provides the necessary documentation (available to download at the bottom of this page) to allow an employer to set up a Cycle to Work scheme in order to provide employees with a bike and cycle safety accessories. The key points are:

• The employer buys the bike and cycle safety accessories selected by the employee;
• Most employers can reclaim the VAT on the bike and accessories purchased;
• Most employers can claim capital allowances on the bike and accessories purchased;
• The employer loans the bike to the employee for an agreed period. This hire period is normally 12 to 18 months. The employee pays hire charges to the employer through a salary sacrifice arrangement for the duration of the hire period;
• As a result of the salary sacrifice arrangement the employer saves the Employers NIC (generally 12.8%) of the salary being sacrificed;
• The Cycle to Work scheme is only available in the UK

At the end of the hire period the employer can sell the bike and accessories to the employee for a nominal amount. Alternatively the employer can retain ownership of the bike and accessories and allow the employee to use the bike and accessories with no salary sacrifice.

Information regarding the ammended VAT process which came into affect from 1st January 2012 can be found by CLICKING HERE

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Can I see an example of how the scheme could work?

The table below contains 2 examples, one based on higher rate tax payer with NIC (National Insurance Contributions) above the upper limit and one on a basic tax rate paying between the lower and upper NIC earnings limit.


** Savings are illustrative and are based on the employees PAYE and National Insurance rates in the examples
The savings are reduced if the employer sells the bike to the employee at the end of the hire period.
Previous to January 2012, VAT was an available saving, however changes from Januray 1st 2012 now require output VAT to be applied to payments made by employee to employer. To read more details of how this VAT adjustment affects you, CLICK HERE.

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Who can take advantage of the Wiggle Cycle to Work Scheme?

The scheme is open to all employers.

Employees must satisfy for following criteria:

1. They must be on their employers payroll and pay tax through PAYE;
2. Their contracts of employment cannot be shorter than the hire period;
3. They must be over 18 years old;
4. Their salary cannot fall below the national minimum wage following the salary sacrifice;
5. They should have completed any probationary periods.

The scheme must be made available to all employees. It cannot be restricted to certain employees such as senior management.

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What does the employer need to do?

The employer is responsible for managing the scheme in order to ensure that all Cycle to Work criteria are met in order to achieve the PAYE and NIC savings available.

The employer needs to be involved in setting up the scheme, ensuring payroll deductions are made during the period of the scheme and then transferring the bike and safety accessories to the employee once they have been paid for.

Wiggle will provide assistance in setting up the scheme. We have prepared pro-forma legal documents which the employer can use to enter into an agreement with an employee to recover the cost of purchasing the bike and safety accessories through a salary sacrifice arrangement. These agreements will also make the necessary amendments to staff contracts to deal the salary sacrifice arrangements. We also give employers the option to pay for the bike and cycle accessories online using a company credit card or to pay by cheque.

The only ongoing administrative requirement is to ensure salary sacrifice deductions are made from the employees salary. This deduction is a fixed amount for a fixed period. Accordingly the ongoing administration requirement is minimal.

At the end of the salary sacrifice arrangement, once the bike and cycle accessories have been paid for, the employer will need to raise a VAT invoice to the employee for the fair market value of the bike and accessories in order to transfer legal ownership. For a guide on how to calculate this final fair market value payment, click here.

As the bike is company property during the period of the salary sacrifice agreement, and although the employee is responsible for insuring and maintaining the bike, we also recommend that the employer notifies its insurers of the Cycle to Work arrangement.

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How do the savings work?

Significant savings are available as a result of Government initiatives to encourage healthier lifestyles and to help reduce environmental pollution. Cycling to Work is a key part of this initiative.

As a result an employer can provide a bike and related safety accessories to an employee for commuting purposes free of tax (PAYE) and NIC.

The employer can recover the cost of purchasing the bike and safety accessories from the employee by hiring the goods to the employee. The employee pays the hire charges through a salary sacrifice arrangement which results in a PAYE and NIC saving for the employee. Depending on the employers VAT status, the employer can also recover the VAT. NOTE: A recent european judgement will require VAT to be added to output salary sacrifice payments from January 1st 2012. CLICK HERE to read more.

The employer also saves money as there is no Employers NIC to pay on the amount of salary sacrificed by the employee.

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What is salary sacrifice?

A salary sacrifice is an arrangement between an employee and employer where an employee receives a lower salary for an agreed period in return for receiving a non-cash benefit from their employer. The non-cash benefit is the supply of the bike and the related safety accessories.

The total salary sacrifice for the Cycle to Work scheme is the cost of the bike and related safety accessories. The total salary sacrifice is apportioned equally over the period the employer hires the goods to the employee. For example if the total value of the bike and safety accessories is £600 and a salary sacrifice period of 12 months is agreed, the employees gross salary will reduce by £50 per month for the 12 months.

As the employee has a lower gross salary, say £50 per month as per the above example, the employees PAYE and NIC liability reduces. Therefore the true cost to the employee is not £50 per month but £50 less the PAYE and NIC saving.

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How long will the salary sacrifice period last?

The salary sacrifice period is at the discretion of the employer and is usually between 12 and 18 months, but can be any period of time up to six years.

The length of the salary sacrifice period should not affect the overall cost to the employee. For example a bike and related safety accessories costing £600 should result in a £50 monthly salary sacrifice over 12 months or £33.33 per month over 18 months.

If a salary sacrifice arrangement is in place for more than 18 months then the employee has the right to cancel the arrangement as soon as the 18 month period has elapsed.

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How does salary sacrifice affect an employees other benefit entitlements?

As a salary sacrifice arrangement reduces an employees gross salary there may be a knock on effect on other benefits. Although the effect on other benefits is likely to be small the employer should communicate any affects on other benefits to the employee. A salary sacrifice arrangement can potentially impact the following:

• Pension contributions based on gross earnings;
• Pension received if an employee is close to retirement and has a final salary pension arrangement;
• Entitlement to contribution based benefits like the state pension;
• Entitlement to earnings related benefits like Maternity Allowance;
• Entitlement to work related payments like Statutory Sick Pay.

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How much can I save?

Savings for both the employee and employer vary depending on the rate of tax and NI the Employee pays.

For example, a lower rate tax payer (paying 20% PAYE tax and 12% NI) would save approximately 32% off the normal Wiggle price. Likewise, if the employee is paying a higher rate of tax (paying 40% PAYE tax and 2% NI) would save approximately 42% off the normal Wiggle price. However as Wiggle prices are often less than the normal retail prices the employees true saving can often be far higher. The employer will also make a saving on the employers NIC on the value of the salary sacrifice.

These savings do not include the transfer of ownership fee, known as a Fair Market Value.

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Can I take advantage of Wiggle Promotions?

If the employer buys bikes and safety accessories online then they can take advantage of any Wiggle Promotions at that time.

Wiggle Promotions are not available if the employer is paying by cheque or with a voucher.

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How much can I spend?

The value of the bike and safety accessories to be made available to the employee is at the discretion of the employer.

There is no formal limit on the value of the bike and safety accessories that can be provided and it is possible for an employee to have two bikes if an employee needs a bike at either end of a train journey between home and work.

However, despite there being no formal limit, most employers are limiting the value of bike and safety accessories made available to each employee to £1,000. This is because the OFT have issued a Group Consumer Credit Licence for employers adopting the Cycle to Work scheme up to a value £1,000. This means that if the value of the goods is under £1,000 the employer does not need to apply for a Consumer Credit Licence for the scheme. If the value of the goods exceeds £1,000 the employer will need to apply for a separate Consumer Credit Licence.

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You can buy any bike and cycle safety equipment.

Safety equipment is not defined in legislation but the Department of Transport have indicted that it can include the following:

• Cycle helmets
• Bells and bulb horns
• Lights including dynamo packs
• Mirrors and mudguards
• Cycle clips and dress guards
• Panniers, luggage carriers and straps to allow luggage to be safely carried
• Locks and chains to secure the bike
• Pumps, puncture repair kits, cycle tools and tyre sealant to allow for minor repairs
• Reflective clothing
• White front reflectors and spoke reflectors

As the above list is not defined in legislation and has been prepared by the Department of Transport employers may wish to confirm with their local tax inspector that they agree with the guidance given.

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Where will the bike be delivered?

Due to security measures for cardholder not present transactions bikes purchased online are sent to the cardholders address.

We are able to send bikes direct to employees home addresses if the employer chooses to pay by cheque

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Who pays for and owns the bike and related safety accessories?

The employer must pay for the bike and related safety accessories and these goods remain the property of the employer until the hire period finishes. At the end of the hire period the employer may choose to sell the employee the bike at a fair market value.

Click Here to learn how this final amount can be calculated.

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Will the bike ever belong to the employee?

In order to take advantage of the tax breaks available for buying a bike and safety accessories for commuting purposes the employer will need to buy and own the bike and safety accessories and hire them to the employee for a fixed period.

At the end of that hire period the employer has the option to sell the bike to the employee at fair market value. An agreement cannot be made between the employer and employee to transfer ownership of the bike until the hire period is over as this would invalidate the scheme and the tax savings would be lost.

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How is fair market value calculated when ownership of the bike is transferred to the employee?

The Inland Revenue have issued the following Valuation Table to help guide employers and employees into coming up with a realistic fair market value. The following table lists realistic % amounts. If ownership of the bike transfers for less, it is up to the employer to prove the reasons this has been done with photographs and other reasonable evidence to support the lesser % transfer - e.g. excessive use and wear. If a value of 10% is used and the Inland Revenue deem that it should be higher then this will result in a benefit in kind for the employee.

The valuation table

Age of cycle	Acceptable disposal value percentage
	Original price of the cycle less than £500	Original price £500+
1 year	18%	25%
18 months	16%	21%
2 years	13%	17%
3 years	8%	12%
4 years	3%	7%
5 years	Negligible	2%
6 years & over	Negligible	Negligible

How to use the valuation table

• The original price of the cycle is the price for which it was on sale as new at the time when it was first provided to the employee. In salary sacrifice arrangements this price may be clearly referred to in the documentation. Cycles are normally acquired by employers at arm’s length from unconnected persons and where this is the case, either of the following can be accepted as the original price of the cycle:

• • the amount that the employer paid or was invoiced for the cycle or
  • the retail price of the cycle that was taken into account in working out any hire payments.
     

• It is acceptable to use the VAT exclusive amount in calculating the original price of the cycle. However, where the valuation percentage is applied to a VAT exclusive amount, VAT will need to be added to the result in order to arrive at the acceptable market value. This must be done regardless of whether or not the employer is VAT-registered. For example, if the original price net of VAT was £400, then whilst the VAT rate is 20%, the acceptable` market value at 2 years old will be £61. ((£400 x 13%) + (VAT at 20% x £52) = £52 + £9 = £61).
  

Note: This guidance is solely about a simplified method of calculating the value of used cycles in the context of taxable employment income and is not intended to have any bearing on the actual VAT position. Employers will need to refer to the appropriate guidance or seek advice on how to account for VAT on sales of used cycles
 

In calculating the original price of the cycle, include safety equipment fitted to the cycle (such as lights and bells) but not safety equipment which would be worn by the cyclist (such as helmets or reflective clothing). Where used regularly for commuting and/or travel between workplaces, safety equipment worn by the cyclist is likely to have a market value that is lower than the table percentages for a cycle and cycle-based safety equipment.

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Does the employee need to use the bike to cycle to work?

The employee must mainly* use the bike and safety equipment for "qualifying journeys". A qualifying journey means a journey, or part of a journey, between an employees home and workplace or between one workplace and another.

As cycling only part of a journey is required, cycling to and from the station to get a train to work would qualify an employee for the scheme.

* mainly means more than 50% of the time using the bike and safety equipment must involve a qualifying journey. It is the responsibility of the employer to monitor this.

If the bike and safety accessories provided under the scheme are not mainly used for qualifying journeys then the employee may lose the benefit of the PAYE and NIC savings available through the scheme.

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Who is responsible for insuring the bike?

The employee is responsible for insuring the bike. Cover can normally be obtained through home insurance. The insurers should be advised that the employer has an interest in the bike.

If the bike is stolen whilst uninsured the employee will continue to be liable for any outstanding hire payments through the salary sacrifice arrangement.

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Who is responsible for maintaining the bike?

The employee is responsible for maintaining the bike.

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What happens if the employee takes unpaid leave?

If the employee takes unpaid leave, including maternity and paternity leave, the employer will normally extend the salary sacrifice period for the number of unpaid months. This extension to the period of the salary sacrifice arrangement is normally capped at 6 months.

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What happens if the employee leaves his job before he has finished paying for the bike and accessories?

The payment for the bike and safety accessories by the employee is formalised through a Hire Agreement regulated by the Consumer Credit Act. This is a non-cancellable legal agreement. The hire charges under the agreement are made through a salary sacrifice arrangement.

If the employee leaves his employment through any reason during the salary sacrifice period then the employer will normally require the employee to pay compensation. The compensation is generally the employers costs which have not been offset due to the non-completion of the salary sacrifice arrangement.

This compensation payment will be taken from the employees final net pay and will not qualify for the PAYE and NIC savings normally available.

This compensation payment may be viewed as a termination fee and should cover the fair market value of the goods in order to transfer their legal ownership from the employer to the employee.

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Do we need to advise any Government authority, including the Inland Revenue?

There in no requirement to notify any authority and prior approval is not required. However once the Cycle to Work scheme has been established an employer may wish to check with their tax office that PAYE and NIC does not need to be accounted for any salary sacrificed.

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Who do I contact if I have any further questions?

Please email us at cycle2work@wiggle.co.uk

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What forms do I need?

You must download and print out the following PDF which contains the following forms:

• Introductory letter
• Order form including financial info
• Pre Contract Information
• Hire agreement

Follow the links below to print each form

- All Required Forms
- Examples
- FAQ's

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HMRC VAT Revision effective January 1st 2012

Background

Astra Zeneca operated a flexible remuneration package scheme under which employees could opt to take part of their remuneration in the form of goods and/or services rather than as salary. The case before the Court of Justice of the European Union (CJEU) concerned the correct VAT treatment of high street shopping vouchers provided to employees as one of the options of the scheme.

The Court found that the provision of vouchers amounted to a supply of services effected for consideration. As a consequence, whilst Astra Zeneca was able to recover VAT incurred on acquiring the vouchers, output tax was due on the consideration received from its employees.

Although this case was concerned with the supply of vouchers to employees, the principles considered by the Court are of general application and will apply to other supplies of goods and services to employees.

The UK position on the provision of goods and services via salary sacrifice or deductions from salary
Following earlier decisions by the UK courts, HM Revenue & Customs' (HMRC) policy was to make a distinction between the VAT treatment of supplies of goods and services to employees by a deduction from salary, and those provided under a salary sacrifice arrangement.

Deduction from Salary
This occurs where an amount is deducted from an employee’s pay in return for a supply of goods or services by the employer. Output tax has always been and continues to be due on the amount deducted from salary. Input tax is recoverable in accordance with the normal rules.

Salary Sacrifice

For VAT purposes 'salary sacrifice' has a very narrow and specific meaning. It describes an arrangement such as in the Co-operative Insurance Society case [1992] (VTD 109) where an employee opts to receive services and forgoes part of their salary in return. The employee enters into a new employment contract or has their existing contract amended to reflect the new arrangement which they are tied into.

In relation to such schemes HMRC have, to date, accepted that the reduction in the salary did not constitute consideration for the benefits received and output tax was not due. Employers were able to recover the related VAT as input tax, subject to the normal rules.

In cases where the employee has been provided with the use of a good (for example a home computer) and opts to purchase it at the end of the scheme it has always been HMRC’s view that VAT is due (where applicable) at that stage.

The Judgment of the CJEU

The Court considered whether the provision of the vouchers was a supply for a consideration. It found that there was a direct link between the provision of the retail vouchers by the company to its employees and the part of the cash remuneration which the employees gave up.

As far as arrangements involving deductions from salaries are concerned, the judgment supports HMRC’s existing policy that these are consideration for a supply for VAT purposes.

However, HMRC considers that the rationale used by the CJEU goes wider than deductions from salary, and as a consequence of this there is no longer a distinction between deductions from salary and a salary sacrifice. Therefore, the amount of salary foregone is consideration for supplies of the benefits whether provided under a salary sacrifice or by a deduction from salary.

It is clear that the principles applied by the CJEU are not confined to vouchers, but are equally applicable to many other situations where employers offer benefits to their staff. Where the benefit is subject to VAT, output tax will be due from, and input VAT recoverable by the employer in accordance with the normal rules.

Implementation: Revised VAT treatment of salary sacrifice
Businesses providing benefits under arrangements, which qualify as salary sacrifice schemes for VAT purposes, must account for output VAT on these supplies, where they are subject to VAT. In order to allow businesses time to make the necessary adjustments, HMRC will not require output tax to be accounted for on taxable benefits provided under salary sacrifice schemes, until 1 January 2012.

See the annex for details of how this change of practice will apply in particular circumstances.

Valuation
In most cases the value of the benefit for VAT purposes will be the same as the amount of salary deducted or the amount foregone under a salary sacrifice arrangement. Where this is less than the true value (for example where employers supply the benefits at below what it cost to buy them in), the value should be based on the cost to the employer.

Direct Tax
HMRC considers that the judgement is limited to the application of VAT legislation. The principle derived from the CJEU decision is concerned with whether, in the context of the provision of a benefit by an employer to an employee as part of the remuneration, that constitutes a supply of services affected for consideration. There is no comparable concept within tax law applicable to the taxation of employment income and HMRC will not be amending the existing published guidance relating to employment income issues.

Further Advice: If you are in doubt about the correct VAT treatment that applies to you, please contact the HMRC VAT helpline on 0845 010 9000. Please note, this is a government helpline and is not a Wiggle Ltd telephone number

Annex

Effect of the CJEU judgment in particular circumstances

Cycle to Work Scheme
Under the Cycle to Work Scheme employers purchase bicycles and safety equipment and provide them to employees. Where this has been done under a salary sacrifice arrangement, the effect of the judgment is that employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle.

Affected businesses should apply this treatment from 1 January 2012. Employers can continue to recover VAT on the purchase of the bicycle and associated equipment.

Employers who have provided bicycles under deduction from salary arrangements are unaffected by the judgment as payments received from employees have always been subject to VAT and will continue to be so.

VAT remains due when a bicycle is disposed of and its value should normally be based on the price of an identical or similar item, taking into account the age and condition etc.

We are aware that valuing bicycles has caused difficulties for Scheme operators and therefore, to reduce administration burdens, the table used to value bicycles for direct tax purposes may be used. This table provides valuations for bicycles based on the age and original price. Any bicycles that fall outside of the table (such as antique or specialist bicycles) should be valued using the normal VAT valuation rules. If businesses choose to use lower values, they may be challenged in which case evidence will be required to support the valuation.

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