You walk away. What would you expect to happen?
Every cycle to work policy that I've seen puts the obligation for insurance on the employee who is hiring the bike, not on the employer / owner.
The "fail" here is, as I pointed out above, that we are in a transition. Most Cycle To Work schemes are currently set up so that the employee pays off the total purchase price of the bike by way of the salary deductions and pays a nominal fee to buy the bike at the end of the rental period. This is not how the schemes should work.
What should happen is that the total amount the employee pays covers the value of the bike. Thus, in your example:
- Employer buys bike for £1000 on C2W scheme
- Employee signs a salary sacrifice to reduce their salary by £33 per month
- After 12 months, you've sacrificed £400 (although, depending on your tax band, this has only cost you around £200)
- You have the bike valued (properly) and it's worth £600
- So employer asks for £600
- Total cost of a £1000 bike = £800
The savings are not as much as doing it illegally, as most schemes have done in the past, but that is how the rules have always been set out and you still make a saving.