c2w scheme to start charging VAT

[lejogger]

I'm looking at introducing one here, but I've only been in the post for 2 weeks, so I'll wait a bit.

Just go for it! I can see the headlines in the monthly newsletter now...

"New Employee Sacked after false promises of C2W scheme saving ends in administration nightmare"

Congrats on the new job btw Norm.

 

[SquareDaff]

OK - I've just taken out a a new scheme which starts in Aug. Value of the bike is £1000.

Simplifiying everything, am I right in understanding that........

I get paid 4 weekly and the payment works out circa £47.
This means the 1st payment after 1st of Jan will be £47 + £9.4 (the 20% VAT element).

My scheme also "give" you the bike as a benefit in kind. Will this mean my taxable benefit will also increase by 20%

 

[lejogger]

OK - I've just taken out a a new scheme which starts in Aug. Value of the bike is £1000.

Simplifiying everything, am I right in understanding that........

I get paid 4 weekly and the payment works out circa £47.
This means the 1st payment after 1st of Jan will be £47 + £9.4 (the 20% VAT element).

My scheme also "give" you the bike as a benefit in kind. Will this mean my taxable benefit will also increase by 20%

Are you paying this back over 18 months? are you a standard rate tax payer? Have you already signed a contract?

Taxable benefit will remain the same. Residual value of a £1k bike after 12 months is £250 or £210 after 18 months.

 

[SquareDaff]

Are you paying this back over 18 months? are you a standard rate tax payer? Have you already signed a contract?

Taxable benefit will remain the same. Residual value of a £1k bike after 12 months is £250 or £210 after 18 months.

Standard Rate tax payer - electronic signature about 10 days ago
Schemem runs 12 months.

 

[lejogger]

Ok. So I've been reading the HMRC website and this part in particular is very interesting:

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."

The paragraph seems to state that there is no change at all should your scheme work by 'deduction from salary' as opposed to a 'Salary Sacrifice' - the definition of which is that rather than just taking a deduction from your salary, your entire employment contract is re-written or amended to take the scheme into account.
As far as I am aware, most schemes would operate via the former, so does anything change at all???

Now i've always approached the scheme from a point of view that discounts the VAT anyway because my experience of the scheme has always been through the public sector, but for interest and to aid in advice given to those who do make VAT savings does this mean that their savings will be unaffected or am I misinterpretting?

 

[cloggsy]

My employers can't claim the VAT back anyway, so it doesn't really matter to me...

 

[Norm]

Now i've always approached the scheme from a point of view that discounts the VAT anyway because my experience of the scheme has always been through the public sector, but for interest and to aid in advice given to those who do make VAT savings does this mean that their savings will be unaffected or am I misinterpretting?

One thing that I've never seen is that the rental payments need to match the cost price of the bike.

Thus, (and ignoring VAT for a moment) if someone rents a £900 bike over 12 months, is there anything which requires the salary sacrifice to be set at £75 per month?

If that is the case, then there is nothing to say that the rental payments will be affected by this clarification. I understand that HMRC said they were only considering the final payment in this notice, so confirming that their recommended valuations were to be done at the gross rather than the net costs of the bike to the employer. Thus, for instance, a bike which cost £599 would have a value of £149.75 (which is 25% of £599) at 12 months rather than £89.85 (which is 18% of £499.17).

 

[kevin_cambs_uk]

Considering the hassle of tax returns and P11D etc, with the tax people, for me its just not worth the grief.

Interest free credit for me.

 

[Joseph]

Lots of posts here... I'll try to give answers for most of the outstanding questions!

OK - I've just taken out a a new scheme which starts in Aug. Value of the bike is £1000.

Simplifiying everything, am I right in understanding that........

I get paid 4 weekly and the payment works out circa £47.
This means the 1st payment after 1st of Jan will be £47 + £9.4 (the 20% VAT element).

My scheme also "give" you the bike as a benefit in kind. Will this mean my taxable benefit will also increase by 20%

There's no rquirement that your payment changes on the 1st Jan, that will be at your employers discretion. However from the 1st Jan, the employer will have to pay the 20% VAT on the money they take from you to HMRC (so if they leave the payment the same they will be getting less money).

Ok. So I've been reading the HMRC website and this part in particular is very interesting:


The paragraph seems to state that there is no change at all should your scheme work by 'deduction from salary' as opposed to a 'Salary Sacrifice' - the definition of which is that rather than just taking a deduction from your salary, your entire employment contract is re-written or amended to take the scheme into account.
As far as I am aware, most schemes would operate via the former, so does anything change at all???

Setting up a salary sacrifice is very simple - just a letter can be used to amend your overall salary for the length of time. Some companies do it like this, some don't. I do wonder if it will turn out that some of the 'deduction from salary' schemes weren't correctly accounting for VAT - certainly the last scheme I was in did salary deductions, and never provided me with a VAT invoice.

One thing that I've never seen is that the rental payments need to match the cost price of the bike.

Thus, (and ignoring VAT for a moment) if someone rents a £900 bike over 12 months, is there anything which requires the salary sacrifice to be set at £75 per month?

If that is the case, then there is nothing to say that the rental payments will be affected by this clarification. I understand that HMRC said they were only considering the final payment in this notice, so confirming that their recommended valuations were to be done at the gross rather than the net costs of the bike to the employer. Thus, for instance, a bike which cost £599 would have a value of £149.75 (which is 25% of £599) at 12 months rather than £89.85 (which is 18% of £499.17).

Absolutely correct - the payment made by the employee is at the discretion of the employer (or in some cases, the scheme company the employer has nominated). There is no requirement to charge a hire fee, and the hire fee can be anything from 1p upwards.

Considering the hassle of tax returns and P11D etc, with the tax people, for me its just not worth the grief.

Interest free credit for me.

Many companies already do P11Ds for other benefits (eg. private medical insurance). Cycle to work schemes don't automatically require a P11D or a tax return though. A P11D is only required if the employer transfers the bike to you at an undervalue (fairly easy to avoid) and will not automatically result in you getting a tax return - you just send a copy to HMRC and they'll usually deal with it directly or send you an abbreviated (1 page) tax return to fill in. Many employees paying 40% tax will already be doing something similar to gain tax relief on personal pension contributions.

 

[Joseph]

A lot of this all comes how employers decide to setup their scheme, and whether they use one of the third parties that issue vouchers or not.

In a good setup:

1. The company deals directly with a local bike shop. They will hence treat it as a cash sale, and offer discounts or freebies.
2. The total money deducted from the employees salary (including the final payment) should be equal to the full cost of the bike etc (inclusive of any VAT in both cases).
3. The final payment should be set following the HMRC guidelines to avoid needing P11Ds etc.

The end result is then:

1. Employer is not out of pocket, and in fact has saved 12% employers NI on the amount sacrificed from the employees salary, which should more than cover any admin costs in most schemes.
2. Employee is saving employee's NI (say 10%, but it's complicated) and income tax (20% or 40%) on the payments they've made, and had interest free credit.
3. Employee is hopefully a bit fitter, which benefits both parties.

 

[Norm]

Absolutely correct - the payment made by the employee is at the discretion of the employer (or in some cases, the scheme company the employer has nominated). There is no requirement to charge a hire fee, and the hire fee can be anything from 1p upwards.

This being the case (as I believe it is), I still reckon that the most equitable scheme for the employer and employee would be one which sets the rental payments to be 75% of the bike's purchase price and then charges 25% at the time of sale, regardless of whether the purchase price is over or under £500 and subject to a 12 month minimum rental.

Both employee and employer benefit from tax / NI reductions and there is no taxable event. The only downside is that the salary sacrifice (and tax/NI savings) is only on 75% of the cost price of the bike... but then you aren't paying 125% of the bike's value so I think that's got to be better?

 

[Jezston]

After a couple of weeks of studying the implications of the VAT addition to the cycle to work scheme by our finance and HR departments, looking into alternatives such as company loans and their tax implications, my employer has decided that it will no longer be offering the Cycle To Work Scheme, nor any alternative assistance in purchasing a bike.

They have decided as a gesture of good faith that they will pay the VAT on those who already have signed up and who will still be paying into next year, which is very generous.

I would be immensely surprised if my employer has got it wrong over this, but from a private conversation with one of the finance people, their calculations seemed to suggest that, for those on a lower tax bracket, purchasing a bike with a value above £500 would potentially cost more on the scheme than without, £700 for those on higher tax brackets.

If this is indeed correct, I really think if the government wishes to encourage bike use then they should scrap the scheme and introduce something far more predictable and transparent, like a reduction or removal of VAT on bicycles. And better infrastructure, education and enforcement - although that won't be as immediately easy.

 

[wiggydiggy]

I've not had an answer yet on my company, I did get a call this week from the external company that manages the scheme for us to say its being discussed/looked at and I should get an answer soon.

I'll have to ask them exactly as I am a lower tax bracket and was planning on maxxing out the C2W allowance, sounds like it may not be worthwhile now if I go above £500?

 

[Norm]

Jez, if they are charging the full value of the bike in the rental payments, ask them why.

I've pointed out above that I don't think that they need to. If the rental payments / salary sacrifice was set to cover only 75% of the bike's cost, every one is still a winner.

Except you, that is, because your employer will have shut down the scheme for no reason.

 

[Jezston]

I've pointed out above that I don't think that they need to. If the rental payments / salary sacrifice was set to cover only 75% of the bike's cost, every one is still a winner.

Apart from the employer, who I presume would have to pay the remaining 25%?