From Purchase to Tax Relief: The Complete Guide to Bike Scheme Capital Claims

You've implemented your bike-to-work scheme, your staff are cycling happily, but are you claiming all the tax relief you're entitled to? Many employers miss out on thousands of pounds in legitimate capital allowances and tax deductions because they don't understand how bike scheme purchases should be treated for tax purposes.

The bottom line: Done properly, your bike-to-work scheme can deliver significant corporation tax savings through capital allowances, VAT relief, and other deductions that go way beyond the employee benefits.

Understanding the Tax Landscape

When your company purchases bikes through a cycle-to-work scheme, you're making a qualifying business investment that can generate substantial tax relief through several routes. The employer can simply buy a cycle and cyclists' safety equipment, reclaim the VAT (if applicable), make use of the capital allowances and loan it to an employee for qualifying journeys to work.

The Three Pillars of Tax Relief

Capital Allowances: The big prize, typically 100% relief on your bike purchases
VAT Recovery: Reclaim VAT on purchases (whilst paying VAT on salary sacrifice payments) Revenue Deductions: Full relief on safety equipment and maintenance costs

Capital Allowances: Your Main Tax Weapon

Annual Investment Allowance (AIA)

For many businesses, expenditure on bikes and equipment will qualify for the Annual Investment Allowance (AIA). The AIA enables a business to fully deduct qualifying capital expenses up to £200,000 annually from its taxable profits.

This means a £2,000 bike purchase delivers immediate corporation tax relief worth £380-£500 depending on your corporation tax rate. Across a workforce of 50 employees, that's potentially £19,000-£25,000 in tax savings. It is important to note that for this to be legal the employer must retain ownership of the bike and the employee then borrows the bike under a hire agreement (i.e. a salary sacrifice arrangement).

What qualifies: Bicycles (including electric bikes), cyclists' safety equipment, bike storage facilities, maintenance equipment.

What doesn't qualify: Cars (unless ultra-low emission), items for personal use only, anything not used for business purposes.

When AIA Isn't Available

If AIA is not available or you've exceeded your annual capital expenditure limit, an 18% allowance per year can be made for bikes, providing ongoing relief over several years.

VAT: The Double-Edged Sword

VAT on Purchases

An employer can reclaim VAT on the purchase of bikes and equipment. As these purchases are deemed a business expense, they can be written off with VAT claimed back through HMRC.

Process:

1. Purchase bike for £1,000 + £200 VAT
2. Reclaim £200 VAT through your VAT return
3. Claim capital allowances on £1,000 net cost

VAT on Salary Sacrifice Payments

Here's the catch: employers offering salary sacrifice arrangements need to account for VAT on these payments. Each salary sacrifice payment is considered a taxable supply and must be included in your VAT return.

Example: Employee pays £100/month salary sacrifice. you must charge VAT, making it effectively £120/month (£100 + £20 VAT).

Safety Equipment: Revenue vs Capital

The company can purchase and provide safety equipment as revenue expenditures, eligible for immediate corporation tax relief.

Revenue items (100% deductible immediately): Helmets, hi-vis clothing, lights, locks, maintenance and repairs.

Capital items (qualify for AIA): The bicycle itself, bike storage structures, charging points for e-bikes.

Step-by-Step Implementation Guide

Step 1: Purchase Planning

• Confirm your AIA position for the tax year
• Check VAT registration status
• Ensure scheme is available to all employees
• Set up proper record-keeping systems

Step 2: Making the Purchase

• Purchase directly from supplier (not through employee)
• Ensure invoices are in company name
• Keep detailed records of bike specifications
• Document business use requirements

Step 3: Claiming Relief

• Reclaim VAT on purchase through your VAT return
• Include in capital allowances computation
• Set up depreciation records (if not claiming AIA)
• Account for VAT on salary sacrifice payments

Record-Keeping Requirements

Essential Documentation

Purchase records: Original supplier invoices, proof of payment, asset register entries, insurance documentation.

Employee agreements: Hire agreements, business use confirmations, salary sacrifice documentation, end-of-scheme arrangements.

Each salary sacrifice payment must be included in your VAT return, so maintain detailed records of monthly amounts, VAT charged, and supporting documentation.

Common Mistakes to Avoid

The Ownership Trap

The bike can not be the property of the employee for the duration of the hire period. If employees gain ownership rights during the scheme, you lose the tax advantages.

Personal Use Issues

The bike must be used primarily for qualifying journeys, at least 50% business purposes. Pure personal use invalidates the relief.

VAT Complications

Many employers forget to charge VAT on salary sacrifice payments whilst correctly claiming VAT on purchases. This creates compliance issues with HMRC.

AIA Miscalculations

Don't assume unlimited AIA. If you've used £200,000 on other equipment, additional bike purchases won't qualify for immediate relief.

End-of-Scheme Considerations

At the end of the rental period, employees can purchase the bike.

Tax implications: Sale proceeds reduce the capital allowances pool, any profit is taxable, losses provide additional relief.

Many schemes recommend continuing the hire arrangement indefinitely to avoid transfer complications and maintain tax benefits.

Your Action Plan

1. Audit current position: Review existing bike assets and claimed relief
2. Check AIA availability: Confirm remaining allowance for current tax year
3. Review VAT compliance: Ensure correct treatment of purchases and payments
4. Update procedures: Implement proper record-keeping for future purchases
5. Plan ahead: Consider timing of future purchases for optimal relief

The Bottom Line

Bike-to-work schemes aren't just employee benefits, they're legitimate business investments that can deliver significant tax relief when handled properly. The combination of capital allowances, VAT recovery, and revenue deductions can make the true cost much lower than the purchase price.

The key is treating bike scheme purchases as business investments, with proper documentation, compliance procedures, and strategic tax planning. Get it right, and your bike scheme becomes a powerful tool for both employee engagement and tax efficiency.

Need help optimising your bike scheme tax position? Contact our team for a free consultation