How do you go about deciding the settlement figure at the end of the loan period?

Posted this reply a few months ago – might be of some relevance to your query;

Sorry, don’t work for a council or a large company, but we run and administrate our own HMRC approved cycle to work scheme in house without a third party facilitator such as Cyclescheme.
The company own the bikes, so at the end of the hire period our members can take one of the following options;
1- Continue to use the cycle free of charge, with no further payments.
This means the company still own the cycle and the hirer cannot sell it as technically it is a company asset and HMRC might require to see it if a check was ever carried out.
When the cycle is six years old ownership can be transferred to the employee with no tax liability.
2- If the employee wishes to purchase the cycle at the end of the initial hire period we will sell the bike for, say £1, and they will then be liable for the tax on the balance left between the HMRC fair market value guidelines.
So, on a one year old £1000 cycle a basic rate tax payer will pay 20% on £249 which equates to £49.80 tax liability collected via a P11d ‘benefit in kind’ form. Total cost to transfer ownership £50.80 which will equate to approx. 5% of purchase price.
Handing the bike back to your employer or worse still, the third party administrator, seems a crazy option to me.

So you only pay the VAT of the valuation fee, not the valuation fee + VAT?

Just found this!

I shall go back in to bat once again in the morning!

EIM21667 – Particular benefits: bicycles: transfer of bicycle to employee
As explained at EIM21664, employers commonly offer loans of cycles to employers under salary sacrifice arrangements. It is not unusual for a cycle to be sold to an employee after the end of the loan period.

If ownership of the cycle is transferred to an employee after a period of use as a benefit during which the exemption described in EIM21664 applied, this may fall within the meaning of “earnings” in section 62 ITEPA 2003 (see EIM00540). To the extent that section 62 does not apply, the transfer will be a benefit and the cost of that benefit is the market value at the date of transfer. This is different from the “special rule” for working out the taxable amount under the benefits code when assets are transferred after a period of use as a benefit (EIM21650).

If a cycle is transferred to an employee at a nominal value (say 5 to 10% of the original retail price), then if the market value is higher, the employee will be taxable on the difference. See EIM21667a for details of an optional simplified approach to valuing cycles sold after the end of a loan/ salary sacrifice period.

The exemption from tax and NICs for loaned or hired cycles only applies where there is no transfer of the property in the cycle or equipment in question. This means that the exemption will cease to apply if ownership is transferred to an employee. Similarly, the exemption will not apply if any agreement builds in from the outset an automatic transfer of ownership to the employee at the end of the hire period.

Rule EIM21667a states;

It is acceptable to use the VAT exclusive amount in calculating the original price of the cycle. However, where the valuation percentage is applied to a VAT exclusive amount, VAT will need to be added to the result in order to arrive at the acceptable market value. This must be done regardless of whether or not the employer is VAT-registered. For example, if the original price net of VAT was £400, then whilst the VAT rate is 17.5%, the acceptable` market value at 2 years old will be £61. ((£400 x 13%) + (VAT at 17.5% x £52) = £52 + £9 = £61).

The £1000 value I used included VAT so the 25% valuation at one year old was also inclusive of VAT.
The 20% mentioned was the income tax rate, not VAT, sorry if this was confusing.