Expenses and Benefits – Cycle-to-Work SchemesWednesday, December 23rd, 2009
Section 244 of the Income Tax (Earnings and Pensions) Act 2003 provides exemption from income tax on the provision of a cycle or cyclist’s safety equipment, irrespective of how it is provided, as long as the specified conditions are met. The exemption, which also applies to National Insurance contributions, has prompted the creation of “cycle-to-work” schemes, often as part of salary sacrifice arrangements. Employees sacrifice part of their salary in return for the loan of a cycle, making it possible for such schemes to be self-financing. As with childcare vouchers, employers generally use commercially-available schemes to provide this benefit.
Three conditions must be met in full if the exemption from both tax and NICs is to apply to the provision of a cycle or cyclist’s safety equipment:
- ownership of the cycle and cyclist’s safety equipment does not transfer to the employee during the period of loan
- the employee uses the cycle or equipment mainly for qualifying journeys, and
- cycles and safety equipment are available generally to employees of the employer.
Cycles and cyclist’s equipment are generally available if the opportunity to use them is available to the whole workforce, without any groups of employees being excluded. This does not impose a requirement, however, for all employees to be given the opportunity of obtaining a cycle and equipment under a salary sacrifice scheme. The condition is met as long as all other employees still have the opportunity of loaning a cycle.
Some employer’s schemes exclude certain categories of employees from participating in salary sacrifice schemes involving cycles and related equipment because
- the necessary reduction in wage would be in breach of the National Minimum Wage, or
- legal restrictions on credit licences do not permit employees under age 18 to participate in the scheme.
If such employees are excluded from the employer’s Cycle-to-Work scheme because they cannot participate in the salary sacrifice scheme, that scheme does not meet the “available generally” condition and, as a result, the exemption is lost for all participating employees. The benefit of the cycle and related equipment must be reported on form P11D. (For more HMRC guidance on this specific situation, see the news item this week “Updated guidance in the Employment Income Manual”.
In December 2009, HMRC drew this situation to the attention of employers and advised them that the rules would be enforced strictly from 18 December 2009 in the following manner:
- For employees that had “entered into Cycle-to-Work salary sacrifice arrangements by 18 December 2009”, the exemption will be treated as continuing to apply until the end of each such employee’s current Cycle-to-Work agreement.
- Any renewal of the current Cycle-to-Work agreement for another cycle will be treated as a new arrangement and will only be covered by the exemption if all conditions (including the availability condition) are fully satisfied.
- For any employee that had not entered into Cycle-to-Work salary sacrifice arrangements by 18 December 2009, the exemption will only apply if all conditions (including the availability condition) are fully satisfied.
In relation to situation 1 above, an employee will be treated as having entered into a Cycle-to Work salary sacrifice arrangement by 18 December 2009 if
- the arrangement was actually operating before the end of 18 December 2009, or
- the arrangement had been finalised in writing before the end of 18 December 2009, provided that it was due to commence no later than 6 April 2010 and it is limited to the provision of one cycle.
Flexible benefit arrangements that allow employees to elect for the provision of a cycle are treated in the same manner.
From 18 December 2009, therefore, employers wishing to ensure that the exemption applies to employees who sign up to or renew Cycle-to-Work salary sacrifice arrangements must ensure that they offer the benefit across the workforce as a whole. If this is not done, the employer is responsible for including details of the taxable benefit on form P11D for each affected employee and for accounting for employer’s Class 1A NIC liability.
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