Any employer can run a Cycle to Work scheme. It can benefit both the employer and the employee.
It is often set up in conjunction with a Salary Sacrifice scheme. Salary sacrifice is where your employee agrees to give up part of their pre-tax salary in exchange for a benefit from their employer. The salary sacrifice arrangement is typically for at least 12 months.
The benefits offered through a cycle to work salary sacrifice arrangement are exempt from tax for the employee.
The employer also does not have to pay employer NICs on the salary foregone.
A separate hire agreement (which may or may not be regulated by the FCA) will be required. This will typically be between the employee and the employer, who has either purchased the equipment or leased it from a third party. The employee will pay for the hire via the salary sacrifice arrangement with the employer.
In many cases, the hire agreement may be between the employee and a third party, such as a scheme provider(see below), who hires the goods to the employee and is remunerated by the employer from the salary sacrifice proceeds.
You can set up and run your own salary sacrifice scheme, or there are Cycle to Work scheme providers who can run a scheme for you. Scheme providers will normally:
Using this arrangement typically means that your employee enters into a consumer hire agreement directly with the scheme provider. The scheme provider will need authorisation by the Financial Conduct Authority (FCA).
At the end of the hire period an employee will have three options:
If you purchase or hire equipment, VAT will be charged on the cost (but not for cycle helmets which are zero rated).
If you do not use salary sacrifice arrangements, this is input tax and is subject to the usual rules on VAT recovery.
If you use a salary sacrifice arrangement, then this is still input tax, but the salary sacrifice constitutes consideration for the equipment and, hence, output tax will be due on the amount of salary forgone.
Disclaimer: This note does not contain a full statement of the law and it does not constitute legal advice. Please contact us if you have any questions about the information set out above.