Taxman to give VAT break to existing cycle to work scheme members

Anyone who joined a cycle to work scheme before July 27 this year will now not have to pay VAT on their remaining repayments. That's the good news from HM Revenue and Customs which will shortly be issuing a clarification Brief on the transitional rules for VAT on such schemes.

The move comes in response to lobbying by the Cycle to Work Alliance which represents cycle to work scheme providers. Previously it had been thought that anyone in a scheme in operation after the 1st of January would have to start paying VAT on their monthly repayments.

The issue of VAT payments on cycle to work scheme bikes has arisen following a European Court of Justice ruling on a long running dispute between Astra Zeneca and HMRC over whether VAT should be recoverable by companies from employees on vouchers bought through salary sacrifice schemes. HMRC won that case and decided that the ruling on VAT applied to all salary sacrifice schemes meaning that companies will be accountable for recovering VAT from their employees on any salary sacrifice payments and, including cycle to work schemes from the 1st of January 2012.

That decision by HMRC was first announced in a tax briefing on the 28th of July this years so any employer setting up a scheme after then should have put in place arrangements to start recovering the VAT on salary sacrifice payments from January. However, the Cycle to Work Alliance which represents the major cycle to work providers such as CycleScheme and Halfords had argued that the July 28th briefing placed an unfair burden on those employers who had started cycle to work schemes before the 28th of July. In its new briefing HMRC will now say that companies will not have to collect and pass on VAT from employees in any scheme that started on or before 27th of July this year even if the scheme extends beyond the 1st of January 2012 when VAT from employees will become accountable in all schemes started after 27th of July.

Steve Edgell, Chair of the Cycle to Work Alliance and Director of Cycle Solutions said:
“The Cycle to Work Alliance is delighted to have worked with HMRC to achieve this new Brief.  It is a victory for common sense and ensures that employers who followed the previous guidance will not be affected by the changes.

The imposition of VAT on salary sacrifice schemes means that from January employees will either have to pay VAT on their monthly repayments or the employer will have to absorb that cost which some fear will either make such schemes unattractive to employees or unviable for employers. However, the Government remains committed to cycle to work schemes as a key plank in their sustainable transport strategy – to date 400,000 people have joined such schemes and bicycle use has jumped significantly in the UK with a report from the London School of Economics suggesting a 13 per cent rise in cycling during 2010.

Scheme providers point out that even with the changes to the VAT rules the typical saving on a bicycle bought under the the scheme is 43 per cent. Of course as soon as you start riding to work you start recouping those monthly payments and probably more. The Cycle2Work Alliance says that it's members are in advanced discussions with employers about ways to minimise the impact of the VAT changes and they are confident that the schemes will remain an attractive option for anyone who wants to start riding to work.