Employer: Can a VAT exempt organisation simply not claim the VAT on the purchase and not pay over VAT included in the amount of salary sacrificed?

Because the employer is making a VATable supply of the bicycle, which is a supply for VAT purposes HMRC cannot set aside the normal VAT treatment that must be applied. A basic tenet of the VAT system is that VAT rests with the final consumer, in this case, the employee.

Therefore, employers are expected to claim from HMRC the VAT incurred on purchasing the bicycle and pay over to HMRC VAT included in the payments received (the salary sacrifice).