What is Balancing Charge (Capital Allowances)?

Full Definition

Capital allowances provide tax relief for the cost of assets used in a business, spread over time through annual writing-down allowances (WDA). A balancing charge is the mechanism that reverses excess relief when an asset is eventually sold for more than the amount still in the pool. The mechanics The main capital allowance pools are: -- Main rate pool: 18% WDA per year on computers, most machinery and commercial vehicles -- Special rate pool: 6% WDA per year on integral building features, long-life assets and high-CO2 cars Disposal proceeds are deducted from the pool. If the proceeds exceed the remaining pool value, the pool goes negative -- this negative balance is the balancing charge. Example: Pool value at start of year: GBP 8,000 Asset sold for: GBP 12,000 Pool balance after disposal: -GBP 4,000 Balancing charge: GBP 4,000 (added to taxable profits) The balancing charge is limited to the total allowances previously claimed on the pool, so you cannot be taxed more than the total relief you received. Single-asset pools Some assets are tracked in individual single-asset pools: -- Short-life assets (elected out of the main pool for faster relief) -- Cars used partly for private purposes by employees or directors -- Certain assets where the disposal creates an asymmetric position On disposal of a single-asset pool: -- If sold for less than the pool balance: a balancing allowance is given (remaining pool value is fully deducted) -- If sold for more than the pool balance: a balancing charge arises Cessation of trade When a business stops trading, all remaining pools are closed out. This commonly produces a balancing allowance on the main pool and may produce balancing charges on specific assets that have recovered in value.

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