The ability to allow staff to purchase bicycles through the Cycle to work scheme is a fantastic tool and great incentive. There are many articles detailing the tax implications of the Cycle to work scheme and how they work so we won’t be going over these here. Instead – we’ll pick up the specific accounting entries required to ensure we comply with the financial reporting requirements.
There are 3 areas to consider:
- Initial purchase
- Lease period
- Disposal
To highlight the accounting entries we’ll use a basic example to put numbers to entries. Let’s assume a bike is purchased for £1,000 + VAT. Leased to an employee over 12 months for £100 per month (via salary sacrifice) and at the end of 12 months the bike is sold for £200
Initial Purchase
So this is the easy part. The bike is treated as an asset of the business and should be accounted for as such.
You should therefore:
Monthly depreciation can then be posted against this asset.
Lease Period
This gets a little trickier, we need to account for both the salary sacrifice but also VAT, and unfortunately this can’t be done in one transaction. Here’s what we suggest you do:
1. Set up a new nominal code for the salary sacrifice. This should be a balance sheet item.
1.1 The default Xero code for net wages is 814 and we would recommend a code close to this
1.1.1. i.e 816 – Cycle to work salary sacrifice
2. Set up another nominal code for the income for the cycle to work scheme.
2.2. This should be a P & L item. The default Xero nominal code for other income is 260 and we would recommend a code close to this.
2.2.2 I.e 261- Cycle to work lease income
3. Set up a recurring journal for collection of the lease from the employee:
4. Set up a new pay item in Xero payroll to pick up the deduction from salary
4.1. This should be a pre tax deduction
4.2. The nominal code associated with this should be 816 – Cycle to work salary sacrifice
The above should allow the correct recording of the income from the lease, the VAT liability and the debt due from the employee (and subsequently paid through payroll)
Disposal
As with the initial purchase there is no special treatment of the sale of the asset. The usual disposal journals would apply.
