The government introduced ‘cycle to work’ back in 1999. Broadly, this is an annual tax exemption that allows a business to loan bicycles and cycle safety equipment to employees as a tax-free benefit. This tax break has had a positive impact on workplace health and employee motivation and has encouraged new groups of people to take up physical activity. But can it work for small companies?
The ‘cycle-to-work’ tax breaks apply equally to directors of one-person limited companies as they do to regular employees of large businesses. This means that the company (the employer) can buy a bike and bike safety equipment and loan it to the director (the employee) for qualifying business journeys. There is no requirement for a formal agreement to be drawn up and no need for prior approval by HMRC.
The company can purchase the bike directly and reclaim VAT, where relevant, on the purchase price. For corporation tax purposes, a deduction may be claimed on the full cost of the bike using the capital allowances annual investment allowance (AIA).
The company can also provide any safety equipment for the cyclist i.e. helmets, high visibility jackets, cycle clips, and so on, and these will be treated as revenue expenditure, eligible for corporation tax relief.
There are a couple of conditions to be met in order to qualify for the deductions:
- ownership of the bike is not transferred to the employee during the loan period – so the bike remains owned by the company; and
- the equipment is used mainly for qualifying journeys. Broadly this means at least 50% business use - i.e. for journeys made between home and the workplace, or part of those journeys (for example, to the station), travel to clients or for journeys between one workplace and another.
Note that travel to work can include a permanent workplace, so the definition of what qualifies as a work journey for providing tax-free bicycles is wider than the normal travel rules.
For the director/employee, there will be no taxable benefit-in-kind arising from the use of the bike and there doesn’t need to be a reduction in salary to offset the cost of the bike. Therefore, the director’s salary summary will remain unaffected.
The director potentially saves on income tax, because the bike is being funded with gross fee income and not personal income. This could save between 20% - 25%, in comparison with the bike being purchased personally, depending on the director’s earnings.
If the bike is transferred into the director’s personal ownership at a future date a taxable benefit charge will arise based on the market value of the bike at that date. This contrasts slightly with the normal rule that specifies that a taxable benefit charge arises in the value of the bike at the time it was first provided to the employee. Where the bike is transferred, the company will pay corporation tax on the market price, but the director will have potentially gained significant tax relief on the bike’s purchase.
Note that the company owns the bike, the cost of any repairs will remain a cost to the company.
Along similar lines to claiming mileage for using a private motor vehicle for business journeys, it is also possible to claim mileage for bikes owned personally and used for journeys to and from a temporary workplace. HMRC allow cyclists to claim 20p per mile for business journeys.
On average, a person who cycles an additional five miles to work and back each week will burn up around 4,500 extra calories and reduce their carbon footprint by around 45kg CO2. With such positive health benefits to be gained, coupled with the current generous tax breaks on offer, swapping car journeys for pedal-power should be well worth considering.