What is a balancing charge on capital allowances and when does it arise?

Full answer

Capital allowances provide tax relief on the cost of plant, machinery, and other qualifying assets used in a business. Rather than deducting the full cost against profit immediately (unless the Annual Investment Allowance applies), businesses write off assets through pools that receive annual writing-down allowances (WDAs). A balancing charge arises when the proceeds from selling a pooled asset exceed the remaining pool value. How capital allowance pools work The main pool receives an 18% WDA each year. The special rate pool (long-life assets, integral features, and assets with CO2 emissions above 50g/km) receives a 6% WDA. Each year you deduct the WDA from the pool value and carry forward the reduced balance (the tax written-down value, or TWDV). When does a balancing charge arise? A balancing charge arises in two situations: 1. Single-asset pool goes negative: some assets are kept in individual (single-asset) pools -- notably short-life assets (where you have elected to segregate them for up to 8 years) and cars with CO2 above the threshold. When a single-asset pool asset is sold for more than the pool's TWDV, the pool goes negative. The negative balance is a balancing charge -- it is added back to taxable profits. 2. Disposal exceeds pool value in main pool: if you sell the last (or only) asset in the main pool and the proceeds exceed the remaining pool balance, the pool turns negative and a balancing charge applies. Contrast with balancing allowance A balancing allowance is the reverse -- it arises when an asset is disposed of (or trade ceases) and the pool has a positive TWDV remaining after the disposal proceeds are deducted. The remaining balance is deducted as a balancing allowance in that final period. Example of a balancing charge A van is bought for GBP 20,000 and placed in the main pool. After 3 years of 18% WDA, the TWDV is approximately GBP 11,050. The van is sold for GBP 14,000. The disposal proceeds (GBP 14,000) exceed the TWDV (GBP 11,050), so the pool turns negative by GBP 2,950. A balancing charge of GBP 2,950 is added back to profits and taxed at the applicable corporation tax rate (19% or 25%). Cessation of trade When a business stops trading, all pools are closed. Any positive balance becomes a balancing allowance (reducing the final year's profits). Any negative balance is a balancing charge (increasing the final year's taxable profits). This can create a significant tax liability if asset values have risen above their written-down values. Small pool WDA If the main pool or special rate pool balance (before any disposal) is GBP 1,000 or less, a business can write off the entire remaining balance as a "small pool" WDA rather than applying the standard percentage rate, regardless of whether this exceeds the normal WDA.

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