There was much talk during the pandemic as to what a hybrid working world would look like once the UK COVID-19 lockdown restrictions were lifted. However, almost two years later, the post-pandemic work environment is still evolving. 

It is clear that the world of hybrid working is here to stay, as evidenced by the difficulties some employers have had in persuading their employees to attend their offices full time. Many employers, recognising the challenges of recruiting during ‘the war for talent’, have become more flexible in meeting requests for hybrid working. Employers are more open to evaluating their employee benefits proposition to align it with their employees’ needs, while still encouraging employees to spend time in the office. What has become evident, however, is that some of the traditional tax-efficient travel benefits are proving difficult to administer.

Cycle to work scheme

The cycle to work scheme was introduced in the Finance Act 1999. Its purpose was to promote healthier journeys to work and to encourage green commuting. Under the arrangements, employees can access bicycles and cycling safety equipment provided by the employer under a hire agreement, typically by way of a salary sacrifice arrangement. With employees agreeing to a reduction in their gross pay, employees pay less tax and national insurance contributions (NIC) because of the salary foregone, and the employer saves on the employer NIC and apprenticeship levy. 

Section 244, Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) sets out the conditions that must be met to qualify for the exemption. These are:

1. there is no transfer of the property in the cycle or equipment in question;
2. the employee uses the cycle or equipment in question mainly (more than 50%) for qualifying journeys (broadly travelling to and from work or in the course of work); and 
3. cycles or cyclist’s safety equipment are available generally to employees of the employer concerned.

During the pandemic satisfying the second condition was not possible for many employees given the government’s lockdown restrictions. In response to this, the government introduced an easement. This meant that employees who received a cycle or cycling safety equipment on or before 20 December 2020 would not have to satisfy the qualifying journeys condition until after 5 April 2022.

In the present day, with the easement no longer available and employees continuing to work remotely, satisfying the second condition remains a challenge – especially the 50% qualifying journey requirement.

The current conditions of the relief are not suitable for hybrid working and, in the authors’ view, the government should consider reviewing the restrictions within the cycle to work scheme so that the scheme can continue to be effective in promoting fitness for employees. 

Green cars

For some time, the view of many commentators had been that the provision of company cars as an employee benefit was becoming outdated. In fact, it was evident in the financial services sector that many institutions had phased out large company car fleets. The reduction was accelerated by the introduction of the optional remuneration arrangements (OpRA) in April 2017. OpRA reduced the tax and NIC savings enjoyed by employers and employees where the car was provided under a salary sacrifice arrangement. 

That said, the government’s drive to reduce carbon dioxide emissions still provides an opportunity to continue to enjoy the use of electric or plug-in hybrid cars where they are provided by way of a salary sacrifice. 

Despite the government’s announcement in Autumn Statement 2022 increasing the benefit in kind charge percentage on electric vehicles from 2% in the 2024/25 tax year to 5% by the 2027/28 tax year (with a 1% increase each year in the intervening UK tax years), this remains a benefit that can deliver significant employee tax and NIC and employer NIC savings.

As with any salary sacrifice, there remains the challenge of ensuring the arrangements are set up correctly. This includes ensuring that:

• all the contractual documentation meets the necessary conditions from a tax and NIC perspective, including meeting the national minimum wage (NMW) obligations and being compliant from an employment law perspective;
• the salary sacrifice meets all the hallmarks of being ‘effective’ as set out in HMRC’s guidance at EIM42760;
• the business has robust processes in place to manage and process all salary sacrifice requests;
• the payroll software and provider, where the payroll is outsourced, have the supporting capabilities to process the salary sacrifice requests.

Providing ‘green’ cars also supports the employer’s environmental, social, and corporate governance (ESG) agenda.

There is a question as to whether a benefit in kind charge arises where the employer reimburses the electricity costs to its employees for charging a company owned electric car that is available for private use. Though HMRC’s guidance at EIM23900 is clear that where this is the case, the reimbursed costs should be subject to PAYE and class 1 NIC via the payroll, this guidance has been challenged on the basis that s239, ITEPA 2003 removes any income tax liability arising on employee expenses incurred in connection with a taxable car. Among other conditions, this exemption does not apply in cases where the employee expense relates to fuel. However, s149(4), ITEPA 2003 explicitly states that fuel does not include any facility or means of supplying electrical energy. Accordingly, it seems to the authors that there is an argument that there should be no UK employment tax reporting or withholding requirement for reimbursed electricity costs. 

It remains to be seen how HMRC will respond to this challenge and whether it will amend its guidance. This issue continues to be a subject for discussion at HMRC’s Employment and Payroll Group.

Public transport

One exemption often overlooked is that set out at s243, ITEPA 2003, Support for public bus services. This exemption was introduced to allow employers, unable or unwilling to operate their own works bus, to provide an alternative method of transport for their employees. In the absence of this exemption, tax would be charged if an employee received a free or discounted bus pass for travel on a route stopping at or near the workplace or travelled on a route stopping at or near the workplace that had been improved as a result of the financial or other support being provided by the employer.

For the exemption to apply the following conditions must be met:

• employees must use the service at least partly for qualifying journeys (qualifying journeys includes journeys between home and work, or between workplaces, that are completed only partly on a bus); 
• the service must be available to all employees of the employer;
• any financial or other support provided must be meaningful – it must make a difference to the particular service or services that support the workplace and it must be paid or provided on an annual basis;
• the financial support must not be recoverable from the employee at any time;
• any other support must not be provided in the course of the day-to-day function of the employer;
• the ticket or pass provided as a result of the financial or other support must be for a specific service or services that serve the workplace. A pass that covers a network of routes in a local area or zone will not meet the terms of the exemption.

In addition, the exemption would not be met where:

• employers use their bulk purchasing power to negotiate discounts on the ticket purchase. Bus tickets should be purchased under normal commercial arrangements; or

• the bus pass is provided under a salary sacrifice arrangement (from 6 April 2017).

Though often forgotten in the current hybrid working environment, the current cost-of-living crisis may cause employers to revisit this exemption.

Commuting costs in the UK are generally not deductible. The last Office of Tax Simplification report entitled Hybrid and distance working report: exploring the tax implications of changing working practices reported that a number of overseas governments allow, to differing extents, deductions for commuting costs. Many individuals, particularly those commuting by train, would welcome such an approach. Commuting by train being greener than commuting by car, this could be seen as supporting the government’s green agenda but the cost to the Exchequer is likely too prohibitive for such a radical change in policy.

Meeting green challenges

The hybrid working world is posing numerous challenges across all taxes. More broadly, however, it is providing employers opportunities to innovate and find solutions to incentivise their employees. With ‘going green’ being high on the ESG agenda both from a political and employer perspective, providing ‘green’ cars is very attractive. However, all benefits, not just green cars, require careful implementation to make sure the employment tax compliance implications are identified and addressed.

Steve Wade, Partner, and Dalbir Kathuria, Director, People Advisory Services, EY

Hear Steve Wade talk about how hybrid working is affecting the taxation of greener forms of transport on the ICAEW Insights podcast.