Capital allowances is the term used to describe the tax relief businesses can claim on certain capital expenditure and thereby reduce the amount of their taxable profits. Most ‘capital’ items, such as equipment, vehicles, machinery etc, last for a reasonably long time and the tax rules do not allow you to automatically deduct the full cost of such items in one go. There are different rules that apply to different types of capital expenditure such as 100% First-Year Allowances (FYA) for certain energy-saving plant and machinery.
When an asset is sold, and on which capital allowances have been claimed, and the sale price is more than the balance in the relevant pool of assets, then the business is required to add back the difference to their taxable profits. This is known as a balancing charge. A balancing charge effectively reduces tax relief to the net cost to the business – the cost less sale proceeds. The balancing charge works in the opposite way to a capital allowance and increases the amount of profit on which tax is due.
Where an asset is sold on which the Annual Investment Allowance or FYA had been claimed and the pool has a zero balance then the amount the asset is sold for (or its market value if given away or used privately), is the balancing charge. There are special rules for dealing with any balancing charges where a business ceases to trade.
Buying and selling assets that may attract tax relief can present a number of planning challenges, and we recommend that you seek professional advice on the best way to structure these acquisitions and sales in order to maximise available tax reliefs.