Self employed on CIS scheme using AIA

Mrsspence345

Hi I'm considering buying a van in cash and claiming it as an AIA on my 20/21 returns..
I'm a brickie so currently on the CIS scheme and claim my tax refund each year so how would that work with claiming the AIA on the new as I over pay tax and claim it back through CIS so it can't be deducted from tax I owe?
Also is the AIA the full amount of the asset or the full amount of tax paid for the vehicle 
Thanks for any help 

[Deleted User]

I hope that you will not be offended is I say that, given your questions, you should not be attempting self-assessment yourself. You can see how much is at stake if you get this wrong. 

Your tax refund, as always, is calculated by working out the tax liability on your PROFIT and deducted the CIS tax from that. This profit will be reduced by the full cost of your van (less any private use percentage). So, assuming you are a basic rate taxpayer you tax would be reduced by 20% of the cost of your van and your National Insurance by 9% of the cost if the van) 
Obviously the tax year has over nine months to run and it could well be this time next year before you get that refund. Can you not wait until next March to significantly shorten the time between purchase and refund?

Pennywise

You deduct the cost of the van (adjusted for private use proportion) from your profits.  You have to be careful because you won't get any further tax relief once your profits have been reduced to the £12,500 annual allowance level.  (though you would save some NIC).

Mrsspence345

Thanks guys and no offence taken and I don't mind the wait either really as the van is required ASAP really! So its the tax amount at 20% and ni amount at 8% you get back from the purchase of the van rather than the full cost of the van?
I'll will be speaking to an accountant most definitely but just wanted some adcive on here as I've heard so many different things! 

Jeremy535897

Maybe an example is best. If you earn £30,000 a year all subject to CIS deduction at 20%, and have no other income, and you have expenses of £5,000 (materials, tools, motor expenses, insurance etc) your tax for 2020/21 is as follows:
Tax at 20% on £30,000 income less £5,000 expenses less £12,500 personal allowance  is £2,500
NIC at 9% on £30,000 income less £5,000 expenses less £9,500 class 4 NIC lower profits limit is £1,395
Class 2 NIC at £3.05 a week is £158.60
Total tax and NIC is £2,500 +£1,395 +£158.60 = £4,053.60
Tax deducted under CIS is £30,000 at 20% = £6,000 so refund is £1,946.40.

If you buy a van for £6,000 and claim AIA, and it is 80% business and 20% private use, your AIA is £4,800.
Your tax is now 20% of £30,000 income less £5,000 expenses less £4,800 AIA less £12,500 personal allowance =£1,540
Your NIC is now 9% of £30,000 income less £5,000 expenses less £4,800 AIA less £9,500 lower profits limit = £963
Class 2 NIC is £158.60
Total tax and NIC is £1,540 +£963 +£158.60 = £2,661.60
Tax deducted under CIS is still £6,000 so refund is now £3,338.40
Refund has increased by £3,338,40 - £1,946.40 = £1,392, which is 29% of the AIA on the van of £4,800.

[Deleted User]

Mrsspence345 said:

Thanks guys and no offence taken and I don't mind the wait either really as the van is required ASAP really! So its the tax amount at 20% and ni amount at 8% you get back from the purchase of the van rather than the full cost of the van?
I'll will be speaking to an accountant most definitely but just wanted some adcive on here as I've heard so many different things! 

Well - much advice is given on the building site, most of it not usable. Jeremy has been much more thorough in his response.

Mrsspence345

Jeremy535897 said:

Maybe an example is best. If you earn £30,000 a year all subject to CIS deduction at 20%, and have no other income, and you have expenses of £5,000 (materials, tools, motor expenses, insurance etc) your tax for 2020/21 is as follows:
Tax at 20% on £30,000 income less £5,000 expenses less £12,500 personal allowance  is £2,500
NIC at 9% on £30,000 income less £5,000 expenses less £9,500 class 4 NIC lower profits limit is £1,395
Class 2 NIC at £3.05 a week is £158.60
Total tax and NIC is £2,500 +£1,395 +£158.60 = £4,053.60
Tax deducted under CIS is £30,000 at 20% = £6,000 so refund is £1,946.40.

If you buy a van for £6,000 and claim AIA, and it is 80% business and 20% private use, your AIA is £4,800.
Your tax is now 20% of £30,000 income less £5,000 expenses less £4,800 AIA less £12,500 personal allowance =£1,540
Your NIC is now 9% of £30,000 income less £5,000 expenses less £4,800 AIA less £9,500 lower profits limit = £963
Class 2 NIC is £158.60
Total tax and NIC is £1,540 +£963 +£158.60 = £2,661.60
Tax deducted under CIS is still £6,000 so refund is now £3,338.40
Refund has increased by £3,338,40 - £1,946.40 = £1,392, which is 29% of the AIA on the van of £4,800.

Thanks Jeremy that is unbelievably helpful but what happens if what he earnt is lower (due to the pandemic it will be) as I've been ending up with negative numbers!
For example say he earnt 20k has 2k expenses and has marriage allowance and the van is 6k if I try to work that out I end up with negatives? 

[Deleted User]

The profit would be 20000 less 5000 expenses less 6000 resulting in 9000 profit. (This assumes 100% business use for the van). There would be no tax to pay at all as below the personal allowance of 12500 and all of the CIS tax would be repaid. In that case he could instead claim only 2500 on the van in this year. This would mean that his tax is still zero (profit =20000 less 5000 less 2500 =12500) but the NIC charge would be £270, an extra £270. The remaining allowances on the van (3500) can be claimed on a reducing balance basis at 18% per year.

The choice is, therefore,
 a) claim the whole van, waste some personal allowance and reclaim all
of the CIS tax.
b) claim only 2500 of the van cost, reclaim all but £270 of the CIS tax and claim the remaining allowances in the following years.

Personally, I would go for the second option but it’s not my money!

Jeremy535897

Mrsspence345 said:

Jeremy535897 said:

Maybe an example is best. If you earn £30,000 a year all subject to CIS deduction at 20%, and have no other income, and you have expenses of £5,000 (materials, tools, motor expenses, insurance etc) your tax for 2020/21 is as follows:
Tax at 20% on £30,000 income less £5,000 expenses less £12,500 personal allowance  is £2,500
NIC at 9% on £30,000 income less £5,000 expenses less £9,500 class 4 NIC lower profits limit is £1,395
Class 2 NIC at £3.05 a week is £158.60
Total tax and NIC is £2,500 +£1,395 +£158.60 = £4,053.60
Tax deducted under CIS is £30,000 at 20% = £6,000 so refund is £1,946.40.

If you buy a van for £6,000 and claim AIA, and it is 80% business and 20% private use, your AIA is £4,800.
Your tax is now 20% of £30,000 income less £5,000 expenses less £4,800 AIA less £12,500 personal allowance =£1,540
Your NIC is now 9% of £30,000 income less £5,000 expenses less £4,800 AIA less £9,500 lower profits limit = £963
Class 2 NIC is £158.60
Total tax and NIC is £1,540 +£963 +£158.60 = £2,661.60
Tax deducted under CIS is still £6,000 so refund is now £3,338.40
Refund has increased by £3,338,40 - £1,946.40 = £1,392, which is 29% of the AIA on the van of £4,800.

Thanks Jeremy that is unbelievably helpful but what happens if what he earnt is lower (due to the pandemic it will be) as I've been ending up with negative numbers!
For example say he earnt 20k has 2k expenses and has marriage allowance and the van is 6k if I try to work that out I end up with negatives? 

Yes. Previous post sets out the implications but doesn't adjust for marriage allowance or lower expenses. Looking at those figures, you can claim either £4,250 or £6,000 AIA (assuming that's the business element):
Tax at 20% on £20,000 -£2,000 expenses - £4,250 AIA -£13,750 personal and marriage allowance =£0
NIC at 9% on £20,000 - £2,000 -£4,250 -£9,500 NIC lower profit limit =£382.50
Class 2 NIC £158.60
Total tax and NIC £541.10 less CIS deduction £4,000 refund £3,458.90

Or Tax at 20% on £20,000 -£2,000 expenses -£6,000 AIA - £13,750 personal and marriage allowance = £0 (can't be negative)
NIC at 9% on £20,000 -£2,000 expenses -£6,000 AIA -£9,500 NIC lower profit limit = £225.00
Class 2 NIC £158.60
Total tax and NIC £383.60 less CIS deduction £4,000 refund £3,616.40

The refund goes up by £157.50, which is 9% of the extra AIA used (£6,000 -£4,250)

So claiming the full AIA gains you £157.50 but over several years potentially costs you £6,000 - £4,250 at 29% (current rates) which is £507.50. How long it takes to get the relief depends on how often the van is changed.

Dazed_and_C0nfused

Marriage Allowance for the recipient is a tax credit of £250 though, not an additional tax free allowance like the Personal Allowance is.

Jeremy535897

Dazed_and_C0nfused said:

Marriage Allowance for the recipient is a tax credit of £250 though, not an additional tax free allowance like the Personal Allowance is.

In this example what difference does it make?