8) Can the employee keep the cycle at the end of the loan period?
There should be no automatic entitlement for the employee to take ownership of the cycle and cyclists' safety equipment at the end of the loan period. If the loan agreement (technically a hire agreement under the Consumer Credit Act 1974 (CCA)) allows for ownership of the cycle and cyclists' safety equipment to pass to the employee upon the exercise of an option, the doing of any other specified act by either party to the agreement, or the happening of any other specified event, the resulting agreement is likely to be hire purchase in which case the tax exemption available for a loaned cycle may not be available.
However, at the end of the loan period, the employer may choose to give the employee the option to purchase the equipment. Typically this would be offered at substantially less than the original value of the equipment, but to prevent a taxable benefit in kind arising as a result of the transfer of ownership the employee must pay the employer the fair market value of the equipment. No tax relief is available to the employee for the purchase so, where the price is recovered from salary, it must be deducted from their net salary. VAT will also be payable on the purchase price by the employee on the supply by the leasing company or the employer as owner of the equipment.
Alternatively, the employer may wish to allow their employees to continue to use the cycles and cyclists' safety equipment you have supplied after the initial loan period has ended, without transferring ownership. As long as the employee continues to meet the conditions of the tax exemption (see section 4 above) no tax charge will arise.
9.3 Not Hire Purchase - dealing with what happens to the cycles and cyclists' safety equipment at the end of the hire period
Under a salary sacrifice scheme it is open to employers to sell ex-rental equipment. It is recognised that employers will often wish to do this, because it makes the scheme more attractive to employees. However, in order to obtain the benefit of the tax exemption the employers must not suggest that either the employee or any other person will later have the option to buy the equipment they have hired. Moreover, if the employer states that the employee will or may have this option, then the agreement will fall within the definition of hire purchase in section 189 of the CCA and may not attract the tax benefit. In addition, these agreements will fall outside the scope of the group licence and without the cover of a credit licence the employer may commit a criminal offence. The employer may at a later date exercise a discretion to sell to the employee.
We therefore advise employers that they can indicate in accompanying literature that ex-rental equipment may be sold for a fair market price, but they should make it clear that they cannot commit themselves to doing so, either to the hirer or to his nominee. Any subsequent sale must be pursuant to a separate agreement, entered into after the conclusion of the hire.
Ultimately only a court can decide whether the agreement is hire or hire purchase.
The above is from the DFT web site, so if your employer agrees a cost in advance you don't get the tax breaks and they could be breaking the law.
Ultimately it is up to HMRC to prosecute a company if they think they are selling below the market value and for a court to decide if they are.
Currently HRMC seem to be happy with 5% as a fair market value but the risk is, the government wanting to raise some additional revenue and presuring HMRC to charge for the transfer of ownership as a taxable benefit.
Most employers would argue a fair market value, as what they could get at auction if they sold them as a job lot, rather than what you could sell an individual bike for on the second hand market.