Following the decision of the Court of Justice of the European Union in AstraZeneca UK Ltd v HMRC (Case C-40/09), salary given up in exchange for a benefit is now, as a matter of law, consideration for that benefit. HMRC's guidance at VATSC05880 states that "the remuneration an employee forgoes is consideration for the taxable benefits provided", and that "output VAT will be due from and input VAT recoverable by the employer in accordance with the normal rules".

That has not always been HMRC's approach. Before AstraZeneca, HMRC distinguished between a deduction from salary, made in return for a supply by the employer, and a reduction in salary under salary sacrifice, treating them differently for VAT. HMRC announced the change in Revenue & Customs Brief 28/11, issued on 28 July 2011, and since 1 January 2012 employers "must account for VAT on amounts of salary foregone in return for taxable benefits" (VATSC05880).

In practice, before 2012 an employer could recover the VAT on the cycles it provided without accounting for VAT on the salary its employees gave up. That was a genuine VAT saving, and it is where the idea still comes from. It ended more than a decade ago.

The supply chain: who supplies what to whom

VAT follows supplies, and in the most commonly seen third-party scheme, the supplies do not line up exactly with the contracts. The consumer hire agreement is between the owner and the employee, but the VAT chain runs through the employer:

• the supplier sells the cycle to the party that will act as owner, charging VAT, which the owner recovers in the ordinary way;
• the owner supplies the employer with the scheme it has contracted for, making cycles available to its employees, and invoices the employer for it, charging VAT; and
• the employer, having set up the scheme and paid for it, provides its employees with the use of the cycles under it, in exchange for the salary they give up.

The employer does not hire anything to its employees: that is the owner's role under the consumer hire agreement. What the employer provides is the use of a cycle through a scheme it has arranged and pays for, and it is for that benefit, or taxable supply, that the salary is given up. HMRC's guidance describes the employer's position in the same way: as providing cycles to employees, and accounting for output tax on the salary foregone in exchange (VATSC05881).

The employee sits at the end of the chain and is not registered for VAT, so the two figures that matter for the employer are the VAT it is charged by the owner and the VAT it must account for on the salary sacrificed.

Where the employer is itself the owner, as under the £1,000 FCA exemption, the middle link disappears. The employer buys the cycle, recovers the VAT on the purchase under the normal rules, and accounts for VAT on the salary sacrificed. HMRC's guidance at VATSC05881 describes the scheme in exactly these terms: "Under the Cycle to Work Scheme employers purchase bicycles and safety equipment and provide them to employees."

The employer's supply to the employee is the use of the eligible item under the scheme, and the consideration for it is the salary the employee gives up. VATSC05881 confirms that, under the Cycle to Work scheme, "employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle". VATSC05880 adds that, in most cases, "the value of the benefit for VAT purposes will be the same as the salary deducted or foregone."

The salary sacrificed is treated as VAT-inclusive. At the standard rate of 20%, the output VAT is one sixth of the amount sacrificed: an employee who gives up £1,200 over the hire provides consideration of £1,000 plus £200 of VAT.

Two points follow. First, it is the salary actually sacrificed that sets the output VAT, not the price of the cycle. Second, the same applies however the employee pays. Where salary sacrifice is paused, for example because of the National Minimum Wage, and the payments are taken from net pay instead, those payments are still consideration for the employer's supply, and output VAT is due on them in the same way.

Input VAT, and how the two sides meet

On the other side, the employer recovers the VAT charged on the provider’s invoice, or on the purchase of the cycle where it is the owner, under the normal rules. Because the provider’s supply is used to make an onward taxable supply to the employee, that input VAT is recoverable.

The two calculations are independent of each other. Input VAT is based on what the employer is charged; output VAT is based on what the employee sacrifices. Where the two figures are the same, so is the VAT on each side, and the employer’s net VAT position is nil: in the example above, £200 of input VAT on a £1,200 invoice from the provider and £200 of output VAT on £1,200 of salary sacrificed.

This is also why VAT says nothing about whether the scheme is worthwhile. The employee’s saving is income tax and National Insurance on the salary sacrificed, and the employer’s is employer’s National Insurance. VAT, correctly accounted for, sits alongside both.

A common concern among employers whose main business is VAT-exempt, such as banks, insurers, charities, and education and healthcare providers, is that they will be unable to recover the VAT on the provider's charge but will still have to account for VAT on the salary sacrificed. That is not the position.

Under section 26 of the Value Added Tax Act 1994 and the partial exemption rules in Part XIV of the Value Added Tax Regulations 1995, input VAT is recoverable to the extent that it is attributable to taxable supplies. (In principle, every cost would be attributed directly to the supply it's used to make. In the real, complex world, many costs, such as overheads, can't be, which is what the partial exemption rules are for.) The VAT on the provider's charge is a cost of one specific taxable supply, the use of the cycle provided to the employee, on which the employer accounts for output VAT. It is directly attributable to that supply, not to the employer's exempt business, and so is recoverable in full. An exempt or partially exempt employer is therefore in the same position as any other.

Employers that are not registered for VAT are in a different position. They do not account for output VAT on the salary sacrificed, but nor can they recover the VAT on the provider's charge.

Rates, bundles and why the structure matters

The rate of VAT on the salary sacrificed follows the rate of the supply it pays for. Salary sacrifice is consideration for a supply, accounted for under the normal rules; it does not make every supply standard-rated. A client's finance team put this to us recently, having been told by an AI tool that salary sacrifice is always vatable at 20%, whatever it pays for. That is not right, and the reason turns on how the scheme is structured.

Most cycles and accessories are standard-rated. Pedal cycle helmets are the main exception. Under Item 3 of Group 16 of Schedule 8 to the Value Added Tax Act 1994, helmets manufactured to the standards required by the Personal Protective Equipment Regulations 2002, and showing the required mark of conformity, are zero-rated (VAT Notice 701/23; VPROTEQUIP4030). Note (5) to Group 16 extends that relief to the services described in paragraph 1(1) of Schedule 4, which include the transfer of possession of goods: in other words, their hire. The zero rate therefore applies to the hire of a qualifying helmet, not only its sale.

Whether a helmet hired through a scheme is actually zero-rated depends on whether its hire is a separate supply. Following the decision of the Court of Justice in Card Protection Plan Ltd v Commissioners of Customs & Excise (Case C-349/96), where one element of a package is the principal supply and the others are ancillary to it, there is a single supply, taxed at the rate of the principal element.

Many voucher-based schemes provide a package, a cycle with a helmet and other accessories, under a single hire agreement. Treated as a single supply of cycle hire, the whole package is standard-rated, and at least one voucher-based provider's published guidance confirms that "VAT will be due on the whole amount of salary sacrificed", "even if a Helmet is included in the package being hired by the employee." The helmet will usually have been bought with VAT at 0%, but 20% is then paid on its share of the salary sacrificed. That VAT is a real cost to someone in the chain: the employer or, if it is reflected in a higher sacrifice, the employee.

Separate agreements are not decisive on their own. HMRC's guidance at VATSC11113 is that "the answer will always depend on the facts of each case", and it lists, among the indicators of multiple supplies, that "the terms of the contract and 'economic reality' indicate more than one supply". In our model, each item is chosen, priced and contracted for separately, under its own standalone hire agreement, and in our view each hire is therefore a distinct and independent supply that takes its own rate. The hire of a qualifying helmet is zero-rated: the provider's invoice for it carries 0% VAT, the salary sacrificed for it carries 0% output VAT, and VAT is charged at 0% on the helmet throughout the chain. Every other item is standard-rated in the ordinary way.

The same principle applies to packages that combine a cycle with maintenance and insurance under one agreement. These are generally a single supply, taxed at the rate of the principal element, the hire of the cycle.

When the hire ends and ownership passes to the employee, that transfer is a supply in its own right, made by the owner. VATSC05881 confirms that "VAT is due when a bicycle is disposed of". In a third-party scheme, that is the provider's VAT, not the employer's. That does not change if the employer collects the price through payroll: deducting it from net pay and passing it to the provider does not make the sale the employer's supply.

Where the employee buys the cycle, VATSC05881 states that its value "should normally be based on the price of an identical or similar item", and that "the table used to value bicycles for direct tax purposes may be used", referring to HMRC's simplified valuation table at EIM21667A.

Where the cycle is given to the employee instead, the transfer is a deemed supply under paragraph 5 of Schedule 4 to the Value Added Tax Act 1994, unless the cycle cost the owner no more than £50. Its value, under paragraph 6 of Schedule 6, is what it would cost to buy goods "identical in every respect (including age and condition)". For a cycle transferred once it is six years old, which the valuation table treats as of negligible value, the VAT due is correspondingly negligible. This is the route we use: a free extended-use agreement after the initial hire, ending in a gift once the cycle reaches six years old.

Quite interesting: does salary sacrifice count towards VAT registration?

This section will not apply to most readers, but for the employers it does affect, and for anyone curious, it is worth setting out.

An employer that is not registered for VAT does not account for VAT on the salary its employees sacrifice. That does not make the salary sacrifice irrelevant to VAT. If it is consideration for a taxable supply, its value counts towards the employer's taxable turnover, and an employer whose taxable turnover over the previous 12 months exceeds the registration threshold, currently £90,000, must register (GOV.UK). For an unregistered employer there is no VAT to strip out, so every pound sacrificed counts in full.

Most employers running Cycle to Work at any scale are already registered, so the question rarely arises. Where it can arise is in organisations that are not registered because everything else they do is VAT-exempt, such as some insurers, financial services firms, and healthcare and education providers. An organisation of that kind running Cycle to Work alongside other salary sacrifice benefits, such as electric cars, could find its sacrifices approaching the threshold.

An employer close to the threshold may come across Pertemps Ltd v HMRC, where an employer's salary sacrifice arrangement for travel expenses was held to be outside the scope of VAT. The Upper Tribunal's reason was that the employer supplied nothing but money, and it distinguished AstraZeneca on exactly that point: the vouchers there had value in themselves. In our view, the use of a cycle is no different, and Cycle to Work salary sacrifice remains consideration for a taxable supply.

Where VAT responsibility sits

As with the scheme's tax conditions, the VAT obligations are shared, but not evenly. The obligations you as the reader will care about are that the employer accounts for output VAT on the salary sacrificed, and on any payments taken from net pay in its place, and recovers the input VAT on the provider's charge, or on the purchase where it is the owner. These are entries in the employer's own VAT return, and no provider can make them on its behalf.

The owner, whether a third-party provider or the employer, charges VAT correctly on its supplies: the right rate on the right items, on a valid VAT invoice that allows the employer to recover it. It also accounts for any VAT due when ownership passes at the end of the hire.

For completeness, the employee has no VAT obligations. They are not registered for VAT, and the salary they give up is simply treated as VAT-inclusive consideration for the use of the cycle.

Cycle to Work does not save VAT, and has not done so since 2012. Salary given up in exchange for the use of the cycle is consideration for a taxable supply, so the employer accounts for output VAT on it, treated as VAT-inclusive, and recovers the input VAT on the provider's charge. Each side is calculated on its own figure, and where the salary sacrificed matches that charge, the two cancel. In every payroll report we provide, we split out exactly how much VAT is included in every salary sacrifice amount; giving the total of this to your finance team is all they need to enter the relevant VAT accounting entries as they'll have the input VAT amount from our invoice.

The same holds for exempt and partially exempt employers, whose input VAT on the provider's charge is directly attributable to a taxable supply and recoverable in full. Employers that are not registered for VAT neither account for VAT nor recover it, so for them the VAT on the provider's charge is a cost. Helmets meeting the required standard are zero-rated, bundles take their rate from their principal element, and the transfer of ownership at the end of the hire is a supply by the owner, valued by reference to the cycle's age and condition.

None of this is or needs to be complicated. But it is the employer's VAT return that the scheme passes through, and getting it right depends on knowing which side of the calculation each figure belongs to.

References

Legislation

• Value Added Tax Act 1994, s. 26. Available at: https://www.legislation.gov.uk/ukpga/1994/23/section/26 (Accessed: 9 November 2026).
• Value Added Tax Act 1994, Sch. 4, para. 5. Available at: https://www.legislation.gov.uk/ukpga/1994/23/schedule/4 (Accessed: 9 November 2026).
• Value Added Tax Act 1994, Sch. 6, para. 6. Available at: https://www.legislation.gov.uk/ukpga/1994/23/schedule/6 (Accessed: 9 November 2026).
• Value Added Tax Regulations 1995 (SI 1995/2518), Part XIV.
• Value Added Tax Act 1994, Sch. 8, Group 16, item 3 and Note (5). Available at: https://www.legislation.gov.uk/ukpga/1994/23/schedule/8 (Accessed: 9 November 2026).

HMRC guidance

• HM Revenue & Customs (no date) VATSC05880 – Consideration: Payments that are Consideration: Salary sacrifice. VAT Supply and Consideration Manual. Available at: https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc05880 (Accessed: 9 November 2026).
• HM Revenue & Customs (no date) VATSC05881 – Consideration: Payments that are Consideration: Salary sacrifice: Particular staff benefits. VAT Supply and Consideration Manual. Available at: https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc05881 (Accessed: 9 November 2026).
• HM Revenue & Customs (no date) Protective equipment and VAT (VAT Notice 701/23). Available at: https://www.gov.uk/guidance/protective-equipment-and-vat-notice-70123 (Accessed: 9 November 2026).
• HM Revenue & Customs (no date) EIM21667A – Particular benefits: bicycles: simplified approach to valuing cycles sold to employees after end of loan period. Employment Income Manual. Available at: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21667a (Accessed: 9 November 2026).
• HM Revenue & Customs (2011) Revenue & Customs Brief 28/11: VAT treatment of salary sacrifice arrangements, 28 July 2011.
• HM Revenue & Customs (no date) VATSC11113 – Supply: Single and multiple supplies: HMRC's approach: The general approach. VAT Supply and Consideration Manual. Available at: https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc11113 (Accessed: 9 November 2026).
• HM Revenue & Customs (no date) VPROTEQUIP4030 – Protective equipment: Pedal cycle helmets: The law. VAT Protective Equipment Manual. Available at: https://www.gov.uk/hmrc-internal-manuals/vat-protective-equipment/vprotequip4030 (Accessed: 9 November 2026).
• GOV.UK (no date) Register for VAT. Available at: https://www.gov.uk/register-for-vat (Accessed: 9 November 2026).

Cases

• AstraZeneca UK Ltd v Commissioners for Her Majesty's Revenue and Customs (Case C-40/09) [2010]. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:62009CJ0040 (Accessed: 9 November 2026).
• Card Protection Plan Ltd v Commissioners of Customs & Excise (Case C-349/96) [1999]. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:61996CJ0349 (Accessed: 9 November 2026).
• Pertemps Ltd v Commissioners for Her Majesty's Revenue and Customs [2018] UKFTT (TC06583). Available at: https://www.rpclegal.com/thinking/tax-take/pertemps-expenses-salary-sacrifice-scheme-not-an-economic-activity-for-vat-purposes/ (Accessed: 9 November 2026).
• Commissioners for Her Majesty's Revenue and Customs v Pertemps Ltd [2019] UKUT 0234 (TCC). Available at: https://www.gov.uk/tax-and-chancery-tribunal-decisions/the-commissioners-for-hm-revenue-and-customs-v-pertemps-ltd-2019-ukut-0234-tcc (Accessed: 9 November 2026).