Cycle to Work Scheme

Cycle to Work Scheme

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Hi all

i am about to set up a employee on the cycle to work scheme.

Cant find any clarification anywhere on accounting entries so would really value your advice.

Bike has cost employer  £839.95 + vat £159.99 = Total £999.94

How do i best account for this from salary sacrifice point of view.

Is the gross salary sacrifice over 12 months  £999.94/12 ?  and then the net salary sacrifice go to pay off the cycle loan or is it a P&L expenses.

Every forum has different views on how to account for purchase of bike through to employee paying it back including conflicting advice on how to account for VAT element.

Replies (9)

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By Steve Kesby
11th Aug 2015 11:09

You need to check your figures

The VAT on £839.95 is not £159.99.

And you need to decide what happens with the cycle at the end of the 12 month period. There is no "loan". The salary sacrifice does not purchase the bike. The exemption only works while the employee does not own the cycle.

However, you treat the cycle as a fixed asset of the employer and recover the input VAT in the usual way.

You largely ignore the salary sacrifice, because the employee has exchanged the right to a part of their former salary in exchange for the provision of the cycle. There is, however, output VAT (1/6th) to be accounted for on the amount of the salary sacrifice, which is consideration for the service of being provided with the use of the cycle

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Replying to Bouba:
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By SamBlythe
11th Aug 2015 11:22

Apologies Vat is on bike part as there was a £40.00 cycle helmet purhased with no vat implications.

So can you clarify in your opinion do i just put the salary sacrifice as a deduction from gross salary and thats it.

I am still feeling very confused by it all. 

Everyone has a different answer. I gather the employee is paying the salary sacrifice as a hire charge really with the option at the end of 12 months to buy the bike from the employer for a specific amount of money. Therefore becoming a sale of an asset to employer.

Therefore does this mean the £999.94 for the bike is effectively to be depreciated then sold to clear from employer books at a later time. ie 1year.

I am more confused on vat amounts and actual salary sacrifice amounts to include. As some say to include VAt in amount othrs not.

 

I was going to 

Dr FA £839.95

Dr VAT £159.99

Cr Bank £999.94    for purcahse of bike.

 

Then salary wise £999.94 (inc vat element) / 12 months = £83.33 salary sacrifice from gross wages.

Is this correct do you think.

 

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By Wanderer
11th Aug 2015 13:00

Musn't be an option to purchase

at the outset. If there is then the scheme fails!

Here's some background reading for you:

https://www.gov.uk/government/publications/cycle-to-work-scheme-implemen...

On your VAT point, assuming employer is (normal) VAT registered.

1. Claim VAT back on the purchase.

2. On each 'hire' of £83.33 account for £13.89 of VAT.

(Simplified this ignoring the non vatable helmet.)

 

On the salary sacrifice reduce the employee's gross pay by £83.33 per month,

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By Steve Kesby
11th Aug 2015 13:57

I disagree

The scheme does not fail simply because the arrangement allows the employee to purchase the cycle, at a later time. The exemption for cycles applies where the employee does not own the cycle. During the salary sacrifice period the employer owns the cycle.

HMRC's simplified guidance is wrong in this respect. It says the scheme may fail, because the arrangement may be a hire purchase agreement, rather than a lease where there is an option to purchase.  However, in law, even under a hire purchase agreement, the hirer does not own the asset until the all payments have been made. So it does not cause failure.

However, if the arrangement is hire purchase, because the employee is given an option to purchase at the end of the agreement for significantly less than its market value, then the employer would be precluded from claiming capital allowances.

If the agreement permits a market value purchase of the cycle at the end of the lease period, that does not preclude it from being a lease, albeit a finance lease, permitting the employer to claim the capital allowances.

So a £1,000 (VAT-inclusive) cycle, where the employee is intended to end up with the cycle at the end of a 12-month term usually works like this:

The employee will purchase the cycle after the end of month 12 at the matrix value; £250 (VAT-inclusive) in this case. This will be deducted from their net pay in month 13.

This then means that the employer wants a £62.50 (£750/12) per month salary sacrifice, over the 12 month period. The employee's pay will reduce by £62.50 per month gross over the period, as a result of the reduced figure going through payroll the P&L staff costs figure will be reduced.

Output VAT of £10.42 (£62.50 x 1/6th) will need to be accounted for over the salary sacrifice period:

Dr. Staff costs £10.42

Cr. Output VAT £10.42

The transactions in relation to the cycle itself will be:

On purchase(as per SamBlythe's post):

Dr Fixed assets additions £833.33

Dr Input VAT £166.67

Cr. Bank payments £1,000.00

On sale to the employee:

Dr. Payroll control account £250 (deduction from employees net pay)

Dr. Loss on disposal £833.33 (depreciation adjustment may also be necessary)

Cr. Output VAT £41.67 (£250 x 1/6th)

Cr. Loss on disposal £208.33

Cr. Fixed asset disposals £833.33 depreciation adjustment may also be necessary)

The employer will be entitled to claim capital allowances on the £833.33 (including AIA) and bring in sale proceeds of £208.33, which can just be deducted from any pool balance. Short life asset treatment is not available, because the cycle is being "leased" to the employee.

It is up to the employer to decide on the precise terms, provided the employee does not own the cycle during the salary sacrifice "rental" period

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Replying to Wilson Philips:
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By Wanderer
11th Aug 2015 15:50

Usually works like this?

Steve Kesby wrote:
So a £1,000 (VAT-inclusive) cycle, where the employee is intended to end up with the cycle at the end of a 12-month term usually works like this:

The employee will purchase the cycle after the end of month 12 at the matrix value; £250 (VAT-inclusive) in this case. This will be deducted from their net pay in month 13.

Not in my experience. Usually a secondary period rental is entered into.

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By Steve Kesby
11th Aug 2015 16:12

Secondary period rental

I've only seen that done with an external provider's scheme, like Halfords or Cyclescheme, and not where the employer sets up there own scheme.

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By CR157
13th Aug 2015 13:49

How about not charging the employee due to the admin it causes and the employer provides the bike and equipment as a benefit in kind -  for which there is no b-i-k charge anyway? 

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Replying to gainsborough:
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By Wanderer
13th Aug 2015 13:52

Cost

CR157 wrote:

How about not charging the employee due to the admin it causes and the employer provides the bike and equipment as a benefit in kind -  for which there is no b-i-k charge anyway? 

Because the employer ultimately bears the cost this way. 
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By CR157
13th Aug 2015 14:08

Yes, so don't give the employee a payrise for the year? Still avoids the cost of the admin and the risk of getting it wrong.

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