AIA or Writing down allowances

Lisa1978

Hi all, 

Can you please provide your advice on which would be better - AIA or writing down allowance based on our example below. 

Husband is going self employed.  He will be putting £6k deposit on a 2nd hand van and financing the other £8k;  Is he better using AIA this year or the 18% writing down allowances over the next few years? 

Small business and won't be VAT registered. 

Also would appreciate advice on simplified expenses or using actual expenses.  He will be cash basis and van 100% used for business as we have a car that we use for personal use. 

Thank you. 

Pennywise

Last question first.  If he uses cash basis, he won't have any choice re capital allowances - the cost of the van WILL be a deduction as an expense, in full, in the year of purchase - there is no option to claim WDA or disclaim part of the AIA on cash basis.

As to the main question, the answer is simple - it depends!  It depends on how much profit or loss there'll be in the first year of trading (or the first period to 5 April if trading year is different - that's a whole different story!).  It also depends on his other income in the same tax year.  If he's well into paying tax and NIC without claiming for the van purchase, then it makes sense to fully claim AIA to bring profits down and pay less tax/nic.  However if he's only just over the tax and/or NIC thresholds, then claiming full AIA may bring his income far below the thresholds, meaning he'd save no tax and/or nic anyway, so wasting some of the allowance.  If he makes a loss, with or without the AIA, then he can offset it against employment income (if any) and claim an income tax refund.  So like I say, it depends on a number of things, principally his other income in the same tax year, but also the level of profits/losses with and without the AIA claim.

You really have to crunch the numbers.  Luckily, you don't have to decide whether to claim AIA or not (and in fact whether to use normal or cash basis) until after the end of the tax year, when you come to prepare the accounts/tax return, so you'll have all the necessary numbers/facts re other income, profits/losses etc when the time comes to make the decision, so that's the time to crunch the numbers.

[Deleted User]

Pennywise said:

Last question first.  If he uses cash basis, he won't have any choice re capital allowances - the cost of the van WILL be a deduction as an expense, in full, in the year of purchase - there is no option to claim WDA or disclaim part of the AIA on cash basis.

As to the main question, the answer is simple - it depends!  It depends on how much profit or loss there'll be in the first year of trading (or the first period to 5 April if trading year is different - that's a whole different story!).  It also depends on his other income in the same tax year.  If he's well into paying tax and NIC without claiming for the van purchase, then it makes sense to fully claim AIA to bring profits down and pay less tax/nic.  However if he's only just over the tax and/or NIC thresholds, then claiming full AIA may bring his income far below the thresholds, meaning he'd save no tax and/or nic anyway, so wasting some of the allowance.  If he makes a loss, with or without the AIA, then he can offset it against employment income (if any) and claim an income tax refund.  So like I say, it depends on a number of things, principally his other income in the same tax year, but also the level of profits/losses with and without the AIA claim.

You really have to crunch the numbers.  Luckily, you don't have to decide whether to claim AIA or not (and in fact whether to use normal or cash basis) until after the end of the tax year, when you come to prepare the accounts/tax return, so you'll have all the necessary numbers/facts re other income, profits/losses etc when the time comes to make the decision, so that's the time to crunch the numbers.

As you know also - if the cash basis is used, and the full expense of the van results in a loss, this loss cannot be utilised against other income of that tax year.

Lisa1978

Hi i've done a few projections for April 21 - April 22 : 

Income           £21,500
Expenses       £4,500 (this includes raw materials, fuel (actual receipts), van insurance/servicing/repairs, a proportion of heat/electricity/insurance to home, clothing expenses, advertising and phone bill/WIFI.  

Yearly profit     £17,000

Does the van purchase then come off this for £12,000? What about interest on the HP? Can the interest be included as part of expenses? 

Appreciate any advice.  Thanks. 

PS we will have receipts for all expenditure including fuel receipts and using cash basis. 

Jeremy535897

If the van is used 100% for business, then yes, you can deduct £12,000 in the tax year of purchase (capital allowance if accruals basis, deduction as expense if cash basis). HP interest is not restricted under the cash basis, so you can claim (business proportion only) under either basis.