Taxman decides Cycle to Work scheme is a 'loophole'

The taxman has decided a government scheme to allow employees to buy cheap bikes for commuting is too generous.

Cycle to Work is a salary sacrifice scheme that allowed tax payers a discount of up to 50% on a bike’s retail price.

Up until now, employees “hired” a bicycle from their employers for a sum taken from their salary before tax each month. At the end of the hire scheme, which usually lasted 12 months, the bikes were offered to the employee for a nominal fee, which was usually five per cent of its original value.

New guidance

Her Majesty’s Revenue and Customs has issued new guidance that bikes worth up to £500 new will be worth 18% of that price one year on, 16% after 18 months, 13% after two years and almost nothing after five. Bikes costing over £500 will be worth 25% of their retail value after one year.

The new rules have dramatically reduced the attractiveness of the scheme and apply retrospectively as well as to bikes bought in the future.

It’s hire purchase, but not as we know it

The Cycle to Work scheme is confusing; in effect it’s a hire purchase scheme that allows tax payers the chance to buy a cheap bike, but in order to escape tax it is dressed up as a hire scheme.

A spokesperson for the Environmental Transport Association (ETA) said: “If the Cycle to Work scheme is a tax loophole, it’s one that more than pays for itself through the financial and environmental benefits of more people cycling.”

“Around 400,000 people have so far bought bikes through the scheme so it is a real shame that it has suffered this setback as it was beginning to gain momentum.”

Why should I insure my cycle to work scheme bike?

The government requires that all bicycles on the scheme must be insured against theft or damage. This is because if a bike is not insured and gets stolen or damaged during the hire period, the employee will have to pay back the value of the bike to their employer and will not receive the tax benefits of the scheme.