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Company owned bicycles and motorbikes – contractor tax issues

Contractors are able to benefit from a bicycle bought and provided for use by their limited company under the Cycle to Work Scheme. Depending on their individual circumstances, some contractors may also benefit from a company motorcycle.

“Cycle shops have made a big deal of the Cycle to Work Scheme, which enables employees making a salary sacrifice to use a bike provided by their employer tax-free,” explains James Abbott, of contractor accountant Abbott Moore.

“The same rules also apply to contractors who are employees of their own limited companies. The contractor gains access to a bike tax-free, their company benefits from a corporation tax and possibly a VAT deduction and the contractor can usually buy the bike at a later stage.

And for contractors preferring two wheels but with some added power for longer journeys, it may also be possible to run a company motorcycle tax efficiently.

The Cycle to Work Scheme – how it works

According to Abbott, the scheme works for regular employers by them saying to their staff, ‘you take a salary sacrifice and we’ll loan you a bike’. He explains: “The employer saves on income tax and National Insurance Contributions (NICs) from the salary sacrifice and the employee gets access to a bike with no benefit in kind (BIK) charges.”

The contractor gains access to a bike tax-free, their company benefits from a corporation tax and possibly a VAT deduction and the contractor can usually buy the bike at a later stage

James Abbott, Abbott Moore

The bike should be principally used by the employee for travelling to and from work, and not for personal use. So this can include:

  • Cycling directly to work
  • Cycling to the station to then travel on to work
  • Taking the cycle on the train, and then cycling to work from the station.

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.

The employee later has the option of buying the bike from their employer, and HMRC publishes tables of how the list price of the bike should be depreciated to give a market value so that the employee does not incur a benefit in kind charge.

Contractors are also employees, so can benefit from the scheme

Abbott confirms that limited company contractors can take advantage of the same rules, but without requiring the salary sacrifice. They enjoy the following tax efficiencies:

  • The company gains 100% tax relief via a corporation tax deduction, using the contractor’s Annual Investment Allowance
  • The limited company might be able to reclaim the VAT, hence the bike is considerably cheaper’
  • The contractor 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%, depending on the contractor’s earnings
  • The contractor could, after a few years, buy the bike from their limited company at the market rate, which would mean the bike belongs to the contractor personally. The company pays corporation tax on the market price, but the contractor has gained potentially significant tax relief on the bike’s purchase.

Abbott provides an example:

  • The bike is purchased for £500 (excluding VAT)
  • The company, if not registered under the flat rate scheme, and if the contractor is not making a salary sacrifice, might save £100 in VAT
  • If the contractor is a higher rate taxpayer, they gain 40% tax relief, as they would normally have paid for the bike out of their net income
  • The net cost of the bike is considerably less than its list price.

“The rules about how the bike is used also apply, but most contractors’ place of work is their home,” continues Abbott. “HMRC instructs its tax inspectors only to look at cases where there is clear evidence that the bike isn’t being used mainly for work journeys.

“However, travel to work by bicycle can include a permanent workplace and HMRC’s rules on what constitutes a work journey when considering the provision of tax-free bicycles is more generous than the normal travel rules that contractors are used to.”

Company motorcycles

Contractors who like to travel on two wheels but whose journey may be impractical on a bike may benefit from a company motorcycle, although Abbott stresses that motorbikes don’t benefit from tax breaks like bicycles.

“Motorbikes attract a benefit in kind charge at 20% of the value of the bike when first provided to the contractor,” he says. “So a £12,000 motorbike would result in a benefit in kind tax charge on £2,400.”

If a contractor uses the motor bike for a mixture of business and private use then Abbott highlights that only 5% of the 20% should be treated as a benefit in kind for income tax purposes. A contractor can eliminate this tax liability by reimbursing the company the 5%, and as a result the benefit in kind will then be nil.

Motorbike running costs: accounting for personal and business use

Unlike cars, a contractor will also face a benefit in kind charge equal to the costs of running the motorbike, such as servicing and insurance. This is unless there is business use of the bike, in which case the benefit in kind will be based upon the private running cost element.

“If a contractor’s use of their motorbike is mostly business, their company would incur certain costs irrespective of any private use, which are fixed, such as road fund licence and insurance,” explains Abbott.

“These costs should not be taken into account into any benefit in kind calculation. Other costs that vary with use, such as fuel and mileage-based servicing, should be apportioned according to the ration of business versus personal use, which would be 95%/5% for a contractor using the motorbike almost exclusively for travel to and from clients’ locations.”

National Insurance Contributions (NICs) arising from personal use

But Abbott warns that there is a National Insurance trap: “Unless there is a 100% deduction against any benefit in kind, then a Class 1A National Insurance charge of 13.8% will arise on the whole benefit with no 95% reduction, irrespective of any deduction for income tax purposes.

“This is because partial claims against the benefit in kind for income tax purposes are ignored for National Insurance purposes. If contractor has reimbursed the company for 5% of the benefit, then this would be ranked as a full claim and no Class 1A NI liabilities would to arise.

Abbott also suggests that contractors consider their specific circumstances and whether the actual private use could considered insignificant according to HMRC guidance.

“Each contractor’s individual circumstances are different and they should ask their accountant to run the numbers before investing in a company motorbike,” concludes Abbott.

Updated: Sunday, 3 February 2013

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