E-BIKES ARE TAKING OFF IN THE UK – AND A NEW TAX BREAK COULD ENCOURAGE EVEN MORE PEOPLE TO SADDLE UP

[Woosh]

it's not difficult, David. In my view, a self administered scheme is a lot simpler than signing up with one of the providers. Do you know how many pages the contract with cyclescheme has?
If sites like pedelecs.co.uk take on the task to explain to employers that it's not difficult then we may get thousands of small entities to take it on. Employers download a sample contract, fill in name and address, the monthly salary sacrifice is set to 5% for 12 months.
It can be that simple.

 

[Wander]

i the monthly salary sacrifice is set to 5% for 12 months.
It can be that simple.

Well only if the employer (ignoring employer's NIC) doesn't mind bearing 40% of the cost!

 

[Woosh]

Nope, you are confusing the issue further. The 'rental' for VAT purposes is effectively the gross amount of the salary sacrifice, not the net amount.

In case that the employer elects to charge VAT on rentals:
Let's calculate for example someone on basic tax rate wanting to get a Big Bear for £1,000.
Purchase: £1,000
Salary sacrifice in 12 months (60% of purchase price): £600
Employee tax @ 20%: £120
Employee NI @ 12%: £72
Employee net deduction: £600 - £120 - £72 = £399
(£33.25 a month for 12 months)

Let's calculate the net balance from the employer's perspective:
Purchase price: £1,000
recover VAT: -£166.67
VAT due on rentals: £399 * 0.2 / 1.2 = £66.50
Recover from salary sacrifice: -£600
Saving on employer's NI at 13.8%: -£67.50
Net disbursement: £1,000 - £166.67 + £66.50 - £600 - £67.50 = £232.33

The employer sells the bike at £232.33 + VAT = £278.80

The Big Bear costs the employee net £399 + £278.80 = £677.80
Saving: £322.20 over £1,000

If you increase the sacrifice from 5% to 8% of the purchase price, you can increase the saving.

 

[Woosh]

If anyone wants to check out the numbers, here is a spreadsheet I just made for C2W with VAT:

http://wooshbikes.co.uk/C2W-with-VAT.xls

You can test with different amount in the purchase price and gross monthly sacrifice to see how much saving you can make.
For a basic rate tax payer, the optimal gross monthly sacrifice is £67.
Net savings: 44.2%
For a 40% tax payer, the optimal gross monthly sacrifice is £66.
Net savings: 53%

 

[Green Commute Initiative]

If you are a VAT registered business you must account for the VAT on the service you provide. Since the Astra Zeneca ruling, VAT is payable on the gross salary sacrifice regardless of who owns the bikes. We advise people who are unsure to call the VAT / HMRC helpline to get a definitive answer. They are really helpful. 0300 200 3700

 

[Woosh]

If you are a VAT registered business you must account for the VAT on the service you provide.

Of course that makes sense. However, there are a lot of benefits in kind like company cars where the employees are not charged VAT.
I have produced a spreadsheet for those who want to investigate running their own C2W scheme in the previous post, with VAT. The maximum saving for basic rate tax payers is 44.2% and 53% for 40% tax payers.
My contention is that millions of people working for small businesses employing a handful of staff lose out on this because it's not worth the effort for small businesses to contract out C2W. Retailers, especially mail order retailers also lose out because their margin is already too small, employees lose out because the third party schemes do not maximize savings for them. Millions of staff can benefit if sites like this one participate into making self administered schemes an easy to follow process.

 

[Green Commute Initiative]

GCI is pretty simple for the employer.

They pay us what the reseller charges for the bike. We don't dictate pricing. We’re open about what we charge resellers. (5% of the sale price)

We create and send out all the agreements for electronic signature and then send the employer the amount of the salary reduction.

So all they have to do is pay us and make the salary reduction. Takes the average employer about 10 minutes because we do everything else.

There's no risk to the employer of wrong information or documents that will cause them a problem. C2W agreements are subject to lots of legal requirements such as the distance selling regulations, employment law, and of course the consumer credit act.

You may not need to be FCA authorised for less than £1,000 but you are still subject to the Consumer Credit regulation. If a disgruntled employee goes to the Citizen’s Advice etc your agreements need to be correct. Otherwise you can’t enforce them. If they are for more than £1,000 and you’re not FCA regulated then the FCA will pursue you and they have teeth.

Also agreements need to comply with the regulations or the employee may lose the tax break. Things like ownership, part ownership etc can all cause a problem and a discussion with HMRC.

From a reseller’s point of view GCI is really fast with the money in their account often within a couple of hours of us being paid. We have lots of happy customers and resellers.

Don’t get me wrong I have no problem with employer’s doing their own thing. We’ll even provide advice but it’s like everything else the Devil is in the detail.

Oh! And we don’t charge employees the 7% end of scheme fees our competitors do. We also manage the whole process so nothing for employers to do.

 

[Wander]

However, there are a lot of benefits in kind like company cars where the employees are not charged VAT.

That's like saying 'However on a Tuesday I normally have fish for tea'.

i.e. it may be true but has absolutely no connection with the issue being discussed here.

 

[Woosh]

That's like saying 'However on a Tuesday I normally have fish for tea'.

i.e. it may be true but has absolutely no connection with the issue being discussed here.

I did quote the relevant paragraph in the guidance regarding VAT that is applicable when your company signs up with a scheme provider whereby there is a provision of a voucher:

There has been a VAT update following the Astra Zeneca court case, where the European Court of Justice made a ruling stating that the provision of retail vouchers amounted to a supply of services effected for consideration of VAT.

The guidance document says nothing about charging VAT on rentals when your company runs your own scheme. The previous guidance (2011) clearly stated at the bottom of page 12:

A deduction from salary or similar charge to staff in compensation for noncompletion of salary sacrifice arrangements for the loan of cycles and cyclists’ safety equipment is outside the scope of VAT. It is not consideration for VAT purposes and no output tax is due from the employer and the employee is also not required to pay VAT (see section 7).

It follows that if your company runs a self administered scheme, they may elect not to charge VAT.
The total amount of VAT on rentals in a not for profit scheme is about £67.

 

[GT3]

There's a couple of aspects of GCI's scheme that don't make sense to me?

Firstly, it is the employer who provides the credit. To utilise your licence, GCI must provide the credit, so presumably are doing so on an interest free basis?

Secondly, you appear to claim there are no exit fees, so how do you deal with HMRC's market value guidance (especially as I recall that did not apply to bikes of over £1,000).

I do know my way around this scheme, having set up my employer's and now being on my third bike. We also benefit from a CC licence.

 

[Green Commute Initiative]

I did quote the relevant paragraph in the guidance regarding VAT that is applicable when your company signs up with a scheme provider whereby there is a provision of a voucher:



The guidance document says nothing about charging VAT on rentals when your company runs your own scheme. The previous guidance (2011) clearly stated at the bottom of page 12:

A deduction from salary or similar charge to staff in compensation for noncompletion of salary sacrifice arrangements for the loan of cycles and cyclists’ safety equipment is outside the scope of VAT. It is not consideration for VAT purposes and no output tax is due from the employer and the employee is also not required to pay VAT (see section 7).

It follows that if your company runs a self administered scheme, they may elect not to charge VAT.
The total amount of VAT on rentals in a not for profit scheme is about £67.

This guidance is outdated. this is the current guidance. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/457866/cycle-to-work-guidance-update.pdf

Scroll down to section 2 at the bottom of page 2

 

[Green Commute Initiative]

There's a couple of aspects of GCI's scheme that don't make sense to me?

Firstly, it is the employer who provides the credit. To utilise your licence, GCI must provide the credit, so presumably are doing so on an interest free basis?

Secondly, you appear to claim there are no exit fees, so how do you deal with HMRC's market value guidance (especially as I recall that did not apply to bikes of over £1,000).

I do know my way around this scheme, having set up my employer's and now being on my third bike. We also benefit from a CC licence.

The issue is the hire of the bike not the credit. Employers providing loans to employees are not included in the CCA for loans of less than £15k so the salary sacrifice isn't a regulated activity. Consumer hire is, so the employer must be regulated for Consumer Hire for hire agreements over £1K. We hire the bike directly to the employee using our FCA authorisation.

At the end of the scheme, we make the employee a free of charge loan of the bike at the end of the initial hire and appoint the employee as our agent to dispose of the bike to a third party of their choosing at the end of the loan. They can of course keep the bike. The transfer value for tax purposes at that point is negligible. This is what other C2W providers do as well but they charge the employee a 7% deposit. We don't.

As regards your CC licence it's probably not for Consumer Hire which is what you'll need. It's now all FCA and no longer CC.

 

[Woosh]

This guidance is outdated. this is the current guidance. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/457866/cycle-to-work-guidance-update.pdf

Scroll down to section 2 at the bottom of page 2

Hi Rob,

this is the breakdown for a self administered scheme including accounting for VAT. Savings: 44% for basic rate tax payers, 53% for higher rate tax payers. How much does your scheme save for these two categories?

 

[Green Commute Initiative]

Hi Rob,

this is the breakdown for a self administered scheme including accounting for VAT. Savings: 44% for basic rate tax payers, 53% for higher rate tax payers. How much does your scheme save for these two categories?

I'm sorry I don't understand your calculations.

 

[Woosh]

Rob,

Column B represents the user perspective.
You put into cell B2 the inc VAT price of the bike (£1,000), B3 the gross monthly amount of salary sacrifice (£67).

Cell B4 = 12 * B3, 12 month salary sacrifice (£804).
Cell B6 = B4 * 12%, employee's national insurance
Cell B7 = B4 * 20%, 12 month tax on sacrifice
Cell B8 = B4 - B6 - B7, net deduction on salary sacrifice (£546.72 over 12 months) - This is the inclusive VAT amount of rentals.
Cell B13 = C11 * 1.2, buy out including VAT (£9.50 * 1.2 = £11.40)
Cell B14 = B8 + B13, total cost to the user (£546.72 + £11.40 = £558.12)
Cell B15 = B2 - B14, net saving, £1,000 - £558.12 = £441.88

Saving ratio for the user: 44.19%

Column C represents the employer's perspective.

Cell C4 = - B4, 12 month gross salary sacrifice (-£804)
Cell C5 = C4 * 13.8%, employer's national insurance contribution (-£110.95)
Cell C9 = B8 *20/120, VAT due on rentals (which is same as net deductions)
Cell C10: - C2 * 20/120, VAT recovered from purchase (£91.12)
Cell C12: C2 + C4 + C9 + C10, net disbursement (£1,000 - £804 - £110.95 + £91.12 = £9.50)
To balance the disbursement, the employer will sell the bike for £9.50 + VAT.

The lower panel is the same calculation but done for higher rate tax payer.

Using your scheme and on a £1,000 bike, how much does it cost the user at the end of the day?

 

[Green Commute Initiative]

Rob,

Column B represents the user perspective.
You put into cell B2 the inc VAT price of the bike (£1,000), B3 the gross monthly amount of salary sacrifice (£67).

Cell B4 = 12 * B3, 12 month salary sacrifice (£804).
Cell B6 = B4 * 12%, employee's national insurance
Cell B7 = B4 * 20%, 12 month tax on sacrifice
Cell B8 = B4 - B6 - B7, net deduction on salary sacrifice (£546.72 over 12 months) - This is the inclusive VAT amount of rentals.
Cell B13 = C11 * 1.2, buy out including VAT (£9.50 * 1.2 = £11.40)
Cell B14 = B8 + B13, total cost to the user (£546.72 + £11.40 = £558.12)
Cell B15 = B2 - B14, net saving, £1,000 - £558.12 = £441.88

Saving ratio for the user: 44.19%

Column C represents the employer's perspective.

Cell C4 = - B4, 12 month gross salary sacrifice (-£804)
Cell C5 = C4 * 13.8%, employer's national insurance contribution (-£110.95)
Cell C9 = B8 *20/120, VAT due on rentals (which is same as net deductions)
Cell C10: - C2 * 20/120, VAT recovered from purchase (£91.12)
Cell C12: C2 + C4 + C9 + C10, net disbursement (£1,000 - £804 - £110.95 + £91.12 = £9.50)
To balance the disbursement, the employer will sell the bike for £9.50 + VAT.

The lower panel is the same calculation but done for higher rate tax payer.

Using your scheme and on a £1,000 bike, how much does it cost the user at the end of the day?

Gross salary sacrifice will be £1,000 / 12 = £83.33 Where do you get £67 from?

 

[Woosh]

Gross salary sacrifice will be £1,000 / 12 = £83.33 Where do you get £67 from?

by trials. I start at £50 a month, then increase it until the net disbursement goes low enough. If you put £68 a month into cell B3, the employer can give the bike away at the end, saving an invoice.

Don't take me wrong, I like what you do.

 

[Green Commute Initiative]

The employer can't give it away. HMRC have a table of fair market value you must use when the transfer takes place. They simple work on the age of the bike: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21667 Page 2

 

[Woosh]

yes, I am aware of this.

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.

The valuation table gives 25% of ex VAT value as fair market value after one year, a £1,000 Big Bear will be valued at £250 including VAT.
It does not cause any problem when the total net deduction is higher than £250 - that is the case for our test case, a 20% tax payer will have paid £558.12.

 

[Wander]

yes, I am aware of this.

The valuation table gives 25% of ex VAT value as fair market value after one year, a £1,000 Big Bear will be valued at £250 including VAT.
It does not cause any problem when the total net deduction is higher than £250 - that is the case for our test case, a 20% tax payer will have paid £558.12.

No, you are mixing the issues again. The £250 / 25% is the 'buy out' price at the end AFTER the rentals. You are comparing £558.12 with £250. You should be comparing £11.40 with £250.