Cycle to Work Scheme. How much did I really save ?

At the start of 2010 my 15 year old mountain bike that I was using for the occasional commute was on its last legs.  Purchasing a new bike via the cycle scheme meant that I could buy a better quality bike than I would normally buy which means it would last longer, and I'd be more likely to ride it regularly (the last bit has definitely been true).


My dream bike was a Dawes Super Galaxy. RRP £1500, available at Spa Cycles for £1000 at the time. My local bike shop agreed to match that or do it on the Cycle Scheme for £1300. I was prepared to pay for it all up front, but if there was enough saving, it would be worth buying via the Cycle Scheme.


I went to the CycleScheme website and tapped in my salary, employers code and up popped the table below. Whooo hooo, a 41% saving. Wow!


HOW MUCH COULD I SAVE ?

Total cost of bike and accessories:	£1,300.00
Net cost of bike and accessories, including finance and admin costs (if applicable):	£1,300.00
Income tax saving over hire period:	£520.00
NI saving over hire period:	£13.00
Final cost of bike & accessories:	£767.00
Total saving:**	£533.00
Gross salary sacrifice, based on 10 month hire period (this should be the figure displayed on your hire agreement):	£130.00
Net salary sacrifice, based on 10 month hire period:	£76.70
Percentage saving over RRP:	41%

**Please note :A Market Value payment may be payable upon cessation of the agreement or at the end of the lease period

Being a small print reading sort, I looked into that Market Value Payment. CycleScheme were confidently saying it was 5% of the value. The agreement I had to sign made no mention of 5% and I realised there was a small risk it could change. I read many stories online of people who had no idea they would have to pay even 5%.


That 5% of £1300 was £65 so £767+£65 = £832. A reasonable saving, plus I would be able to spread the payments. There were disadvantages I could see:

• I could not claim for any mileage on the bike if I needed to travel for work (not that I do that anyway)
• There was a small risk of the final value payment changing. The government were very much wanting people to cycle so that's a low risk.
• The biggest problem for me was that I would not own the bike. If it got stolen, I would have to pay the full cost of the bike including VAT, £1300. I keep the bike in my office, not outside so low risk.

The Cycle Scheme won out and that's what I did.

This is where my luck changed

Whilst committed to the payments, HMRC decided that the whole scheme was a tax dodge, and rewrote the rules on the final value. Some chaos came and went and now instead of 5%, my final payment if I wanted to buy the bike outright would be 25% - another £325. Gulp.


The other option on the table is to keep the bike on the hire purchase scheme for another 3 years and for this pleasure it will cost me 7%, or £91. Still more than what I had budgeted for.


I want to buy the bike outright because I no longer trust the government making 'savage cuts' to mess with the agreement. Buying the bike makes the bike too expensive though so I am going to take a risk again. I have actually considered arguing the final value fee down due to the bike being available new for £1000 at the time of purchase but my employer gives the bike to Cycle Scheme and it all seems horribly messy.


So, with my final pay slips in I can see exactly what I have saved.

	Predicted	Actual
Monthly payments	£767	£882
Final Value fee	£65	£91
Total Paid	£832	£973
Saving over £1000 purchase	17%	3%
Own after	1 year	4 years

WOULD I DO IT AGAIN ?

Definitely not. With a standard purchase I:

• would own the bike outright
• could sell it at any point in time
• claim mileage if I need to
• not have to pay the inflated price of £1300 if it gets stolen.
• would know what I paid for the bike.  I still don't know if I will get stung again.

I would be out of pocket £27 though.

PS, loving the Dawes Super Galaxy. A truly brilliant bike.

UPDATE: July 2011

It is now 18 months since I first received my bike. I left you thinking that I had signed up to the 4 year deal that CycleScheme was and still is offering - that is what most people do because it is the easy option.

Part way through my payments, the HMRC clarified the rules on the final value fee. Previously it was 5%, but now the purchase price of my bike put this in the worst case bracket, 25% at the end of year one, or 7% at the end of year four.

The clarification was going to be the end of CycleScheme, but they managed to turn this around and use the clarification to extort additional money from their purchasers. What they were offering was renting the bike for zero cost for an additional three years. At the end of that period you pay 7% to CycleScheme instead of the original estimated 5%. This is what most people do.

It may be the easy thing to do, but there are still is a big holes in this deal. Firstly you still do not own the bike, and there is risk that you will not get to keep the bike. Additionally, you are still vulnerable to changes in the rules by HMRC.

The other two offers on the table from CycleScheme, were hand the bike back (at great financial loss) or pay 25% to get ownership of the bike at the end of year one. What they wanted was £325 (25% x £1300). That is quite a change from the estimated £65.

I want out from the scheme and do not want to sign up to a four year deal but I do not accept that the 25% change has been applied fairly. Let's also not forget that the final value payment is kept by CycleScheme as profit.

At this point in time, I have made 10 payments of £130 under salary sacrifice arrangements. I have paid 100% of the value of the bike. Previously, I was to pay another 5% making the total 105% of the value of the bike. Now, they want 125% of the value of the bike.

There is another option that is legal under the HMRC rules but CycleScheme is not offering because they feel it is too complicated to implement.

If you look at the rules, when the bike is transferred to you, if you do not pay 25% you are taxed on any difference. So, if I was given the bike at the end of year one, I should pay tax on that 25%.

My offer to CycleScheme was to pay them their 5% that they and I were expecting at the start of the scheme and they still make their profit. I will arrange separately to pay tax on the remaining 20% with either my employer or directly with the HMRC. I phoned the HMRC helpline and they can easily adjust my tax code to fix this.

If I pay tax, it is like paying the tax on two of the monthly payments, which I calculate to be £104. Adding the 5% that would make the final payment £169, rather than £325.

I started to think about how I could get my bike at a fair price, through perhaps the financial ombudsman but then I realised I have the bike and I owe them money. If they want the bike or money, they will have to take me to court. That is where I have left it for now. I still do not own my bike, but I have not agreed to the four year deal.

If I do end up in court, I think I have a good case and CycleScheme probably do not want to test that because at the moment, they are extorting a lot of additional money from their victims/purchasers. I don't think the agreement is water tight either. Every way you look at it, this is a cycle purchase scheme, not a hire scheme.


[Not everybody will be asked for 25% at the end of year one. For more information see the HMRC valuation table]

UPDATE: August 2011

Finally, I own my bike!

CycleScheme refused my offer to pay them 5%, and have ever since been sending threatening letters. The last one was from the Debt Recovery Department, accusing me of not owning the bike and that I was risking getting a bad credit reference. Thanks CycleScheme! this really is a hassle free way to purchase a bike.

Essentially, I wrote them a letter saying that I thought they were trying to blackmail and extort money from me and I was prepared to see them in court. They did not bother to write to reply or apologise, they just sent an invoice for the 5% I suggested months ago.

Actually just to make this even more complicated: CycleScheme added 20% VAT to the 5% payment. The 5% was based on the price of the bike including VAT, which I think they may have calculated incorrectly. I decided not to argue about this and paid them £78 instead of £65. If I had paid the 25% they wanted, once VAT was added, they would be asking for £390. Gulp.

I just need to settle up with the tax office now.

It looks like I was right about the Cycle to Work Scheme being open to change within the four year window. The rules are still being changed. Recently it has been decided that VAT will be payable from next January. Although this doesn't directly affect those on the scheme, it would certainly make me nervous about further changes.

The whole scheme is a bodge and is so complicated, it just doesn't seem worth it, especially while there is a middle man (eg CycleScheme) trying to take a cut.