What must be considered when taking advantage of the exemption for cycles and cyclist’s safety equipment?

Before considering the conditions that must be satisfied in order to take advantage of the tax exemption for the provision of cycles and cyclist’s safety equipment, it is useful to understand the basic principles that apply when assets are placed at the disposal of employees.

Taxation of assets placed at employees’ disposal

Where employees, or members of their family or household, have the use of assets without ownership being transferred to them, the cash equivalent of the benefit (other than in the case of land, buildings, cars and vans) is

• the higher of
  • the “annual value” of the asset, i.e. 20% of the market value of the asset at the time is was first used to provide a benefit, and
  • the rental or hire charge paid for it, plus
• any other expenditure incurred to make it available, such as the cost of alterations or improvements, repairs, maintenance, etc.

An asset’s “market value” is the price that it might reasonably have been expected to fetch in a sale on the open market at that time.

Example: An employee is given the use of a new mountain bike that the employer purchased for £1,000.  The employer also pays £110 each year for cycle insurance.  The cash equivalent of the benefit in each full tax year is £310, i.e. £200 (20% of £1000) + £110.

Exemption for tax and NICs

The tax exemption defined in section 244 of the Income Tax (Earnings and Pensions) Act 2003 is a “green” measure.  It also applies for NICs. The exemption is designed to encourage cycling to work and, in fact, the primary condition for the exemption is that a cycle provided for the use of an employee is used to travel to and from work.  A “Cycle to Work” scheme may simply involve an employer loaning cycles to employees from a cycle “pool”.  More commonly, such a scheme is operated in conjunction with a salary sacrifice arrangement.  The tax and NICs exemption may apply in both such situations.

Guidance on the exemption is provided by HMRC at www.hmrc.gov.uk/manuals/eimanual/eim21664.htm and further, more detailed guidance is provided by the Department for Transport at www.dft.gov.uk/pgr/sustainable/cycling/cycletoworkguidance/pdf/518054/

No tax or NICs liability arises in respect of the provision of a cycle or cyclist’s safety equipment if the following three conditions are met:

1. ownership of the cycle and equipment does not transfer to the employee during the period of loan
2. the employee uses the cycle or equipment mainly for qualifying journeys, and
3. cycles and safety equipment are available generally to employees of the employer.

As long as the conditions are met, the exemption applies.  It does not matter how the cycle and equipment are provided, e.g. by means of a voucher that allows the employee to hire a cycle or take one from a cycle “pool”, or by allowing the employee to choose between a cycle and a cash alternative, or as a benefit provided in conjunction with a salary sacrifice.

A cycle is defined as “a bicycle, a tricycle, or a cycle having four or more wheels, not being in any case a motor vehicle”.  The definition would include an electrically assisted pedal cycle.

Cyclists’ safety equipment may include the following items but employers are encouraged to confirm with their tax inspector whether the equipment provided falls with the tax exemption.

• cycle helmets which conform to European standard EN 1078
• bells and bulb horns
• lights, including dynamo packs
• mirrors and mudguards to ensure riders visibility is not impaired
• cycle clips and dress guards
• panniers, luggage carriers and straps to allow luggage to be safely carried
• locks and chains to ensure cycle can be safely secured
• pumps, puncture repair kits, cycle tool kits and tyre sealant to allow for minor repairs
• reflective clothing along with white front reflectors and spoke reflectors.

A qualifying journey is the whole or part of a journey

• between the employee’s home and workplace, or between one workplace and another,
• in connection with the performance of the duties of the employment.

The definition would cover the provision of two cycles, e.g. one from home to the local train station, another from the destination station to the workplace; or a separate cycle for journeys between workplaces.

The term mainly is not defined and it does not prevent a cycle being used partly for pleasure or partly by the employee’s family members.  HMRC accepts that the test is satisfied unless there is clear evidence that less than half of the use is on qualifying journeys.  There is no requirement for employers or employees to keep mileage logs but employees should be made aware that they could lose the exemption if they do not use the cycle mainly for qualifying journeys.

Cycles and cyclist’s equipment are generally available if the opportunity to use them is available to the whole workforce, without any groups of employees being excluded.  This does not impose a requirement, however, for all employees to be given the opportunity of obtaining a cycle and equipment under a salary sacrifice scheme, as long as all other employees still have the opportunity of loaning a cycle.

There is no statutory limit on the value of the cycle and equipment that can be provided, although there are potential consumer credit licence issues if the value exceeds £1,000.  (See below)

Consequently, the exemption would be lost if the conditions were not met, for example because

• the opportunity to be provided with a cycle is limited to individual employees or select groups of employees,
• the employee does not use the cycle for, or mainly for, qualifying journeys
• the employee lives so far from the workplace as to make the journey impractical by cycle
• a cycle is provided that is unsuitable for cycling to and from work, e.g. a child’s cycle or some off-road cycles
• the cycle is provided for a family member, not the employee.

A related tax exemption allows employers that encourage employees to cycle to work on a designated “cycle to work” day to provide free meals or refreshments when they arrive without creating a taxable benefit in kind.

Consumer credit licence

The Office of Fair Trading has issued a group consumer credit licence to cover employers setting up a Cycle-to-Work scheme, thereby removing the requirement for an employer to obtain an individual licence.  However, under the terms of the licence,

• the value of the cycle and equipment that can be provided is limited to £1,000, including VAT and before applying the tax exemption
• the agreement with the employee must be a hire agreement, not a hire purchase agreement –the employee must have a unilateral right to terminate the agreement after 18 months and there must be no automatic right for the employee to buy the cycle and equipment at the end of the loan period.

(There are other rules and the guidance published by the Department for Transport should be considered in full.)

The exemption for cycles and safety equipment is the basis for the popular salary sacrifice scheme whereby employees contractually give up a part of their salary in exchange for the loan of a cycle and related equipment.

The employer may purchase the cycles and safety equipment or lease them through a business partner that specialises in this kind of scheme.  A typical scheme would allow employees to choose from a wide variety of cycles and pay for them through the payroll over 18 months.  The leasing arrangement is self-financing for the employer, the employer also has some Class 1 NICs savings, and the employee saves on both tax and NICs.

Some commercial schemes allow employees to select a cycle from a range that includes cycles that a tax inspector, during a compliance audit, may feel are unsuitable for cycling to and from work, such as children’s cycles and some off-road cycles.  The employer should make it clear in the scheme rules that cycles must be suitable for commuting journeys and that employees must regularly use them in that way.

Disposing of the cycle at the end of the loan period

When a cycle is no longer required by the employer, e.g. because a new cycle is loaned to the employer or, in the case of a salary sacrifice arrangement, the period during which the employer has loaned the cycle comes to an end, the employer or supplier of the cycle could offer it for sale to the employee or to other employees.

There must be no automatic entitlement for the employee to own the cycle and equipment at the end of the loan period.  (See Consumer credit license, above).

Under special rules that apply only to cycles that have been provided under the tax exemption, there is no tax charge on the transfer of cycles and cyclist’s safety equipment to an employee as long as the amount paid by the employee is not less than its market value at the time of the transfer.  If an employee buys a cycle by deduction from wages, the payment must be taken from net pay.

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Written by Ian Congreave -

Filed under: Employer FAQ on March 23rd, 2009

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