c2w scheme to start charging VAT

[lejogger]

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.

Hi Jez,

How does your company scheme operate differently to mine then...

Ignoring VAT for a minute, if a lower tax bracket employee chose a £1k bike from the scheme (as it would be from 01/01/2012) they will pay a net rental fee of approximately £56.66 per month for 12 months. In order to completely pay back their employer the full £1k hire charge. (£83.33 - 32% tax and NI savings).

Is the issue then that previous to this change, some employers have been reclaiming the VAT, but not passing these savings onto their staff, and will now be charging an additional 20% to ensure that they retain their profit from the scheme rather than running it as a profit neutral scheme to benefit staff?

 

[lejogger]

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?

It all depends on the scheme. Which company are your external provider?

 

[Jezston]

No idea, sorry.

I understand my employer was previous using 3rd party operates like CycleScheme and Evans, but recently started administering it themselves.

 

[Red Light]

So presumably VAT will apply to childcare vouchers and a few other benefits. I wonder if its occasioned by a number of employers switching to salary sacrifice for a whole range of other benefits

 

[lejogger]

No idea, sorry.

I understand my employer was previous using 3rd party operates like CycleScheme and Evans, but recently started administering it themselves.

If they administer it themselves and they're not interested in making large profits from the scheme then it should always be a winner for the employee no matter whether they recover the full cost of the bike or not - even with the recent VAT changes.

If you're friendly with the finance people administering the scheme then you could show them this example:

Employee chooses £1k bike. The employer pays £1k but immediately reclaims the 20% VAT.
Out of the employee's salary £1k is deducted over 12 months to pay for the total debt plus (as per the new rules) an additional 20% that counts for the employee's VAT debt. The employee wins because he saves 32% of the £1k. The employer then pays the 20% VAT on the employees behalf and has broken even on the deal - in fact they've made fairly significant NI savings too.

The only thing outstanding is the option for the employers to allow the employee to take ownership of the cycle. In my company the bike is given to the employee for nothing. A p11d is filled in to say that a benefit in kind of £250 has been received by the employee and they will then be taxed on this gift to the tune of £50 the next year.

So the employer has gained in terms of NI savings, and the employee in total has paid £730 for a £1,000 bike and they've done so in manageable installments throughout the year.

 

[Joseph]

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.

I can't make any sense at all of those figures. Did they offer any explanation as to how a scheme that saves NI & Income Tax could possibly end up worse than paying out of post-tax income? I guess it must be something specific to the way they were going to run their scheme - perhaps they assumed that the rental income should cover the whole cost of the bike, rather than rental income + final payment.

 

[lejogger]

So presumably VAT will apply to childcare vouchers and a few other benefits. I wonder if its occasioned by a number of employers switching to salary sacrifice for a whole range of other benefits

Yes other benefits, but not childcare vouchers.

From January 2012 you will need to account for output tax at the standard rate (20%) on any benefits which are normally standard rated. These will include:
Cars and other vehicles

· Bicycles

· Car parking

· Catering

· Face value vouchers

· Computers



VAT will not be due on exempt benefits such as:



· Childcare

· Private healthcare

 

[400bhp]

The only thing outstanding is the option for the employers to allow the employee to take ownership of the cycle. In my company the bike is given to the employee for nothing. A p11d is filled in to say that a benefit in kind of £250 has been received by the employee and they will then be taxed on this gift to the tune of £50 the next year.

This is IMO the large area where employers are not using the scheme in its most beneficial way.

Most will be doing the end payment not as a b.i.k

I know this as this is what my ex-employer did and they would have been responsible for setting up most of the C2W schemes.

 

[lejogger]

This is IMO the large area where employers are not using the scheme in its most beneficial way.

Most will be doing the end payment not as a b.i.k

I know this as this is what my ex-employer did and they would have been responsible for setting up most of the C2W schemes.

As I've said before, this is the problem with private companies trying to exploit a government initiative in order to make a profit.

Of course these individual scheme suppliers will be charging the full residual value, because otherwise they won't make any money. I feel sorry for people working for organisations who are tied into contracts with these companies because they're losing out on a financial benefit that they're entitled to. It's not a hard scheme to implement in house, or next best, go for a scheme run by the LBS or a chain who make their profit from the mark up on the bikes and are happy with getting customers in the door of their shops, not schemes that just sit acting as intermediaries between the bike shops and the suppliers, picking up a cheque for very little service.

 

[400bhp]

As I've said before, this is the problem with private companies trying to exploit a government initiative in order to make a profit.

Of course these individual scheme suppliers will be charging the full residual value, because otherwise they won't make any money. I feel sorry for people working for organisations who are tied into contracts with these companies because they're losing out on a financial benefit that they're entitled to. It's not a hard scheme to implement in house, or next best, go for a scheme run by the LBS or a chain who make their profit from the mark up on the bikes and are happy with getting customers in the door of their shops, not schemes that just sit acting as intermediaries between the bike shops and the suppliers, picking up a cheque for very little service.

You're slightly missing my point.

The "companies" are the employers. There is no 3rd party

The employer charges for the full cost of the bike.

I suspect the b.i.k will route will start to be used more as HMRC's bicycle value table becomes more understood. I think it caught employers out last year (rightly or wrongly)-previously my employer would charge a minimal tarnsfer fee (10%) at the end of the year.

 

[Norm]

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

Nope, look at my example above.

That value was chosen because, by no coincidence at all, it is the highest valuation of a bike after 12 months. So the employee pays rental payments covering 75% of the value and pays 25% of the value to buy the bike after 12 months. The employer gets their money back, makes savings on NI & VAT to cover their admin costs and there is no taxable event.

The employee gets 32% (at least) tax savings on the sacrificed salary and an interest free loan.

The scheme is alive and well and, I believe (from the wording of all the guidance and the fact that there is absolutely no reference to the level of the rental payments) that this is how the scheme was always meant to operate.

 

[Jezston]

Well I tried brining this up with them but they weren't interested. They said it was the VAT not the residual value that was the problem and so it's dead and that's that.

Which really sucks, especially for the increasing number of people considering riding to work where I am.

 

[lejogger]

You're slightly missing my point.

The "companies" are the employers. There is no 3rd party

The employer charges for the full cost of the bike.

I suspect the b.i.k will route will start to be used more as HMRC's bicycle value table becomes more understood. I think it caught employers out last year (rightly or wrongly)-previously my employer would charge a minimal tarnsfer fee (10%) at the end of the year.

Apologies - it was when you stated that your ex employers would have set up numerous schemes - I assumed that it must have been a 3rd party scheme supplier.

 

[lejogger]

Well I tried brining this up with them but they weren't interested. They said it was the VAT not the residual value that was the problem and so it's dead and that's that.

Which really sucks, especially for the increasing number of people considering riding to work where I am.

You better not tell me where you work Jez as I'm halfway to getting in the car to come and thrash it out with them!

If you work for a private organisation, there is no change to them as employers at all. They will have always been able to reclaim the VAT paid for the bikes, the only difference is now they have to collect VAT from you and pass it on to HMRC.

This is only a problem for them if they have been charging you for full cost of the bike plus VAT, therefore not passing on this element of the saving to you, and are now concerned that they are missing out on the tidy profit they've been pocketing.

 

[Jezston]

I don't believe they have been doing that.

Their position is that the savings now are so low that it isn't worth their time administering such a scheme