Changes to end of scheme arrangements – Transfer of Ownership

Background

The Salary Extras Bikescheme operates under government legislation, including guidelines set by Her Majesty’s Revenue and Customs (HMRC).  The scheme works on the basis that an employee can hire a bike from their employer over a 12 or 18 month hire period, and pay for the benefit through a Salary Sacrifice arrangement.  At the end of the hire period, an employer may sell the bikes to employees at a fair market value at that time, though in accordance with scheme legislation there is no automatic right for the employee to purchase the bike at the end of the hire term.

Cycle to work providers have, for some time been seeking clarity from HMRC on how a realistic residual value can be set on bikes hired by employees.  For a number of years our proposed residual value percentage of between 5-7% has been widely accepted by HMRC and as an industry standard.

New HMRC guidelines specifically relating to residual values have now been published and although higher than those used previously, have been welcomed by the industry on the basis that it now provides clarity. For all future schemes the overall savings to employees are still very attractive and in some cases the overall savings can be greater than before.  As HMRC have applied the new guidelines retrospectively all existing schemes yet to transfer ownership will be required to adhere to these changes. 

The Options for Transfer of Ownership

The HMRC guidelines can be viewed here: http://www.hmrc.gov.uk/manuals/eimanual/EIM21667.htm

There are two ways a bike can be valued:

1. Condition based valuation based upon individual review
   This option is dependent on a process whereby 3 different items of documentation are required including photographic evidence (to “prove” a true market value). Some providers have provided a questionnaire for the employee to complete at the end of the hire term but it is questionable as to whether this is too subjective and might be open for challenge if it is not deemed acceptable or realistic by HMRC. 

2. Use of HMRC matrix to establish market value
   HMRC have provided a set matrix of pre-determined values, which would not be challenged if adopted.  The percentage values are based on the value of the bike and safety accessories at the outset of the hire term and the age of the bike at the point at which a transfer of ownership may take place.

Age of cycle	Acceptable disposal value percentage
	Original price of the cycle less than £500	Original price £500+
1 year	18%	25%
18 months	16%	21%
2 years	13%	17%
3 years	8%	12%
4 years	3%	7%
5 years	Negligible	2%
6 years & over	Negligible	Negligible

There is still the flexibility of choosing different ways of using the above matrix as follows:

The main options are:

1.  Adopt the HMRC matrix of residual values and employees pay these amounts to the employer in full.
   This is the simplest option for employers as it mirrors the current processes but it would not be popular for employees as it represents a significant increase in the amount payable at the end of the scheme thus reducing the overall savings.  Employers also need to consider whether they are at risk in terms of recovering higher final payments through net salaries.
2. Deferred transfer of ownership – If employer owns assets
   Following the matrix, transfer of ownership is deferred to a later date when the residual value is lower or even nil. This will require a new Agreement to ensure the employee has rights to use the bike under the same conditions as the scheme while the employer still owns the bike.  This reduces the cost for the employee, enables the employee to continue using the bike in the same way as before, but means they will not actually own the bike until much later.  Please call the helpdesk for details of the new extended Agreement For schemes funded by a leasing arrangement, please see option 5 below.
3. Give the bike to the employee as a benefit in kind
   Companies which are used to working with P11D may prefer this option as it allows employees to take ownership of the bikes and represents savings which are more closely aligned to those schemes run within the old guidelines.  This option does however increase P11D administration but in some cases it may be possible to agree a simpler arrangement to deal with the benefit in kind declarations with the local HMRC office.
4. For Lease schemes only - Combination of transfer of ownership and benefit in kind
   This is an interim solution for most companies who are using a 3rd party leasing arrangement.  The original transfer of ownership payment based on £25 or 7% of original value is collected through net pay and is paid to the leasing company.  Meanwhile the balance (HMRC matrix value less this final payment) is declared as a benefit in kind.  This ensures employees can take ownership immediately after the hire period but will cost employees more.
5. For Lease schemes only - Deferred transfer of ownership
   An arrangement fee of either £25 or 7% of the original value is paid by the employee to the lender to cover the cost of extending the Hire period. This is collected by the employer via a net pay deduction and is paid directly to the leasing company. The Leasing Company then keeps the bike and extends the original hire term with the employer and then allows the employer to transfer the benefits of the extended hire to the employee. This way title to the cycles does not pass to the employee. The employee continues to enjoy the benefits of the bike exactly as before, and ownership is transferred to the employee once the asset value is down to nil as per the HMRC matrix.  For employers choosing this option there is scope to allow individual employees to purchase the bikes out right as per option 1 if they so wish

Costs to Employees

Please click here to view the tables for working examples of the options above. Please note that these calculations and prices cannot be communicated to an employee upfront as it could imply that employees will be offered the bike at the end of the scheme, which is non-compliant for a cycle to work Hire scheme through a Salary Sacrifice arrangement.

Conclusion

It is worth noting that the employee does not have (and never did have) an automatic right to buy the bike at the end of the scheme.  On any communication to employees it is important to convey this, and that although employers may sell the bike to staff at a fair market value at that time, this does not form part of any agreement within the cycle to work scheme. The 5 examples above will help employers decide which route is the best for them from an administrative point of view, and the tables will show the impact on employees in terms of overall cost of ownership. We do urge all employers to confirm the suitability of any arrangement with their tax advisors.