Employer Benefits for the Cycle to Work Scheme

On the 28th of July 2011, HM Revenues and Customs announced important changes to how VAT is incorporated into the Cycle to Work Scheme. This follows the judgement of the European Court in the case of Astra Zeneca.HMRC have confirmed that from the 1st of January 2012, the salary sacrifice scheme for Cycle to Work will be subject to VAT. Employers will therefore charge VAT to employees who are on the Cycle to Work scheme with effect from the 1st of January 2012.

Since HMRC’s announcement in July 2011, our partner Halfords explored the implications of the ruling. After extensive research carried out by their Group Tax Manager, Halfords identified the potential to allow “grandfathering” to apply to existing cycle2work schemes. Halfords championed this approach with HMRC through the Cycle to Work Alliance as a fair and practical approach to implementing the ruling.

We are very pleased to advise that in response to the case developed and presented by Halfords, HMRC has issued further guidance as detailed below:

Salary sacrifice agreements signed before 28 July 2011 which extend beyond 31 December 2011. For salary sacrifice agreements that were in place, that is agreements that were signed before Revenue and Customs Brief 28/11 announcing the change was published (i.e. 28 July 2011) and which extend beyond 31 December 2011.

HMRC will allow amounts of salary foregone in return for taxable benefits to continue to be free of VAT until the dates any fixed-term agreement expires or a fixed number of salary sacrifice payments specified within the agreement are completed. (If the agreement expires before 1 January 2012 any agreement subsequently entered into should follow the VAT treatment described in section 2 below); or, The date of an employee's annual salary/benefits review.

HMRC will regard any salary sacrifice arrangements put in place after that date as a new agreement for VAT purposes which should follow the treatment described in section 2 below. This will be the case even if individual employees continue to receive the same tax benefits as before the review.
Any other review or renegotiation that leads to a change in the provision of benefits under a salary sacrifice agreement or to a change in an employment contract. This would be following one of the above events VAT will be due on any taxable benefits provided on or after 1 January 2012 by way of salary sacrifice.

Salary sacrifice agreements entered into on or after 28 July 2011 Agreements entered into on or after 28 July 2011 must provide for VAT to be accounted for in accordance with the guidance in the Revenue Brief i.e. with effect from 1 January 2012 VAT must be accounted for on amounts of salary foregone in return for taxable benefits.

In summary, all cycle2work arrangements where the agreement was signed prior to 28th July 2011 will be able to run their natural course without any requirement for the Employer to change the employees’ deductions or the VAT payable on those deductions. Halfords welcomes this update, as it will allow existing hire agreements to be unaffected. We can now focus time on ensuring your future cycle2work schemes offer your colleagues the best savings available in the market.

The employer will continue to benefit from NI savings. The Employee will also continue to benefit from NI & Tax savings, however, will not benefit from VAT savings from the 01st January 2012. Whilst the Cycle to Work scheme may not appear as attractive as it has done previously, there are still significant savings available to the employee and we believe that it will continue to be a popular salary sacrifice scheme, which compliments the Government Green Transport Plan.

For more information, please visit the HMRC website