HMRC VAT Update FAQs
Is the Cycle to Work Scheme still a valid and worthwhile benefit?
What effect does the new VAT ruling have on employer and employee savings?
How can I communicate the changes and the benefits to employees?
When does the ruling come into effect?
Will the changes be applied retrospectively?
What is the impact of the update for VAT exempt organisations?
Can VAT exempt employers claim back the VAT on purchases for the
Cycle to Work Scheme (Input Tax)?
Do employers have to issue monthly VAT invoices to their employees?
How is the VAT on the salary sacrifice payments calculated?
What happens if the salary sacrifice payement includes a Helmet, which is VAT exempt?
Is the Cycle to Work Scheme still a valid and worthwhile benefit?
Cyclescheme continues to offer one of the most effective cost saving staff benefits in existence, delivering unparalleled savings to employees whilst generating income for employers.
Cyclescheme’s free-of-charge service will continue to help employers and employees save money, promote healthy living and improve productivity, and create positive environmental impact.
Employers will still be able to reclaim VAT, so this benefit remains revenue positive with Class 1 Employer National Insurance Contribution (NIC) savings as before.
Furthermore, Cyclescheme’s free-of-charge service reduces employer and participant’s administration to a minimum through provision of a market-leading automated process that includes the most straightforward and robust end of hire options available.
What effect does the new VAT ruling have on employer and employee savings?
Employee savings - Still 32% up to 42%!!
Many employees work for organisations that have never been able to pass a VAT saving on as part of the Cycle to Work benefit; hence, their savings will not be affected by this update.
For organisations that currently pass on a VAT saving, employees’ savings will be reduced, but not by 20% (the current rate of VAT). This is because the increase in gross salary sacrifice created by the additional VAT charge makes for greater Income Tax and National Insurance Contribution (NIC) Savings. Here’s an example of the difference in savings based on a standard and basic rate taxpayer:
Basic Rate Taxpayer
| Post VAT ruling, 1st Jan 2012 |
Inc VAT savings pre 1st Jan 2012 |
|
| Certificate Value | £1,000.00 | £1,000.00 |
| Gross Monthly Salary Sacrifice payments | £83.33 | £69.44 (including 20% VAT saving) |
| Income Tax Savings | £16.67 | £13.89 |
| NI Savings | £10.00 | £8.33 |
| Net Salary Sacrifice | £56.67 | £47.22 |
| Overall Saving | £320.00 | £433.36 |
| Overall Saving | 32% | 43% |
High Rate Taxpayer
| Post VAT ruling, 1st Jan 2012 |
Inc VAT savings pre 1st Jan 2012 |
|
| Certificate Value | £1,000.00 | £1,000.00 |
| Gross Monthly Salary Sacrifice payments | £83.33 | £69.44 (including 20% VAT saving) |
| Income Tax Savings | £33.33 | £27.78 |
| NI Savings | £1.67 | £1.39 |
| Net Salary Sacrifice | £48.33 | £40.27 |
| Overall Saving | £420.04 | £516.76 |
| Overall Saving | 42% | 52% |
Employer savings - 13.8% NI Saving!!
Employers will still be able to benefit from Class 1 Employers’ National Insurance Contribution (NIC) savings as before. Additionally, as all VAT registered businesses are able to recover the VAT on the purchase of Cycle to Work Scheme equipment, the benefit remains revenue positive for the employer.
The standard Employers’ NIC saving will increase with the inclusion of VAT in participants’ salary sacrifices from the 1st January 2012:
| Without employee VAT saving, 1st Jan 2012 |
With employee VAT saving, pre 1st Jan 2012 |
|
| Certificate Value | £1,000.00 | £1,000.00 |
| Gross Total Salary Sacrifice payments | £1,000.00 | £833.33 |
| Total Employers' NIC Saving | £138.00 | £114.96 |
How can I communicate the changes and promote the benefits of the scheme to employees?
Cyclescheme also provides employers with free-of-charge promotional material, which may include the following;
• Posters and leaflets
•On site Roadshows*
•Electronic scheme advertising, i.e., emails, website banners etc.
•Paper and electronic copies of Cyclescheme’s Cycle Commuter magazine
•Wage slip inserts
*Roadshows are available for employers with sites with more than 400 employees in regular attendance.
Cyclescheme is ready to help all employers communicate the continued benefits of the scheme to their employees; please contact our Helpdesk on info@cyclescheme.co.uk to discuss your promotional material needs.
When does the ruling come into effect?
The new guidance states that any employer who is registered for VAT is required to account for the VAT included in the amount of salary sacrifice received on or after 1st January 2012 on their VAT return and pay it to HMRC (Output Tax). HMRC have published this announcement (in their Revenue & Customs Brief 36/11) here.
Following representations by Cyclescheme and our Tax consultants Grant Thornton, we now have confirmation from HMRC that for hire agreements entered into on or before 27th July 2011, employers are not required to account for VAT on the salary sacrifice payments that are made after 1st January 2012.
Employers will be able to continue to recover VAT when a bicycle is purchased, subject to the normal rules for claiming VAT, because from 01/01/2012 they will be onward supplying that bicycle and charging VAT. Additionally, VAT exempt employers will be able to recover VAT on Cycle to Work Scheme purchases from 1st January 2012.
Will the changes be applied retrospectively?
Employers will only have to account for VAT for salary sacrifice payments received on or after 1st January 2012 for hire agreements entered into after 27th July 2011.
For hire agreements entered into on or before 27th July 2011, employers are not required to account for VAT on the salary sacrifice payments that are made after 1st January 2012.
Any salary sacrifice payments made prior to the 1st January 2012 will not be subject to any VAT liability.
What is the impact of the update for VAT exempt organisations?
The impact for the Cycle to Work Scheme of the Astra Zeneca judgment is that employers must account for VAT on the consideration received i.e. the amount of the salary sacrificed. This means the amount of salary given up before deductions such as PAYE, National Insurance etc.
The requirement, from 01/01/12 is that the employer, who is registered for VAT, is required to pay to HMRC the VAT included in the amount of salary sacrificed on their VAT return and pay it to HMRC (Output Tax).
The employer can recover VAT when a bicycle is purchased, subject to the normal rules for claiming VAT, because from 01/01/2012 they will be onward supplying that bicycle and charging VAT.
Can VAT exempt employers claim back the VAT on purchases for the Cycle to Work Scheme (Input Tax)?
Businesses that are unable to recover all of their input VAT will from 01/01/2012 be able to claim VAT, subject to the normal rules on input VAT recovery, on acquiring a bicycle that is hired to employees under a salary sacrifice. It is a principle of the VAT system that, broadly speaking, if you make supplies that are subject to VAT then you can claim input (purchase) VAT that is wholly related to that supply.
Can a VAT exempt organisation simply not claim the VAT on the purchase and not pay over VAT included in the amount of salary sacrificed?
Because the employer is making a supply of the bicycle, which is a supply for VAT purposes HMRC cannot set aside the normal VAT treatment that must be applied. A basic tenet of the VAT system is that VAT rests with the final consumer, in this case the employee.
Therefore, employers are expected to claim from HMRC the VAT incurred on purchasing the bicycle and pay over to HMRC VAT included in the payments received (the salary sacrifice).
Do employers have to issue monthly VAT invoices to their employees?
HMRC do not envisage that employers issue VAT invoices each month to their employees - invoices are only legally required when there is a business-to-business transaction.
How is the VAT on the salary sacrifice payments calculated?
Using a £600 Certificate value with 12-month hire period as an example, VAT on salary sacrifice payments can be calculated in the following ways:
If the salary sacrifice amount paid by the employee includes VAT:
Monthly salary sacrifice inc. VAT = £600 / 12 months = £50
Net value = £50 / 1.20 = £41.67
VAT to be accounted for (Output Tax @ 20%) = £50 – 41.66 = £8.33
If the salary sacrifice amount paid by the employee excludes VAT:
Monthly salary sacrifice exc. VAT = £600 / 1.20 = £500 / 12 months = £41.67
VAT to be accounted for (Output Tax @ 20%) = £41.67 * 0.20 = £8.33
What happens if the salary sacrifice payment includes a Helmet, which is VAT exempt?
Whilst Helmets may not be subject to VAT at the point of purchase, the total salary sacrifice amount as payment for hire of the equipment is subject to VAT at the applicable rate (currently 20%). Therefore, VAT will be due on the whole amount of salary sacrificed in exchange for the bicycle and related accessories, even if a Helmet is included in the equipment being hired by the employee.
