DISPOSAL OF ASSETS: Businesses often dispose of items they once claimed capital allowances on.
When this happens you must include the value in the calculations for the same accounting period that you sell it in.
Note: There is an exception to this rule. It is not necessary if you give the item to a charity or to a community amateur sports club (CASC).
What is Disposal of an Asset?
An informal definition of ‘disposal’ is the action of throwing something away or getting rid of it. There is a formal definition related to capital allowances when you sell an asset. It refers to the sale of property, shares, or other items. So, the disposal an asset means you:
- Sell it, give it away as a gift, or transfer it to another person.
- Swap it for something else in exchange.
- Receive compensation for it (e.g. an insurance payout for something lost or destroyed).
- Retain it (but stop using it in the business) or start using it outside the business.
Working Out the Value
As a rule, the amount you sold the item for gets used for working out the value of an asset. But, there are times when you need to work out a market value. This refers to an amount you would expect to sell the item for. Thus, use the market value if:
- The asset did not get sold (e.g. you gifted it away or you still have it but stopped using it in the business).
- You sold the item to a ‘connected person’ for an amount less than it was actually worth.
Note: A ‘connected person (or company)’ might sell an asset to you for an amount less than it cost them. In this case, the value for accounting purposes would be the price that it cost them to buy it.
Definition of ‘Connected People’
A list of connected people would include your:
- Spouse (husband, wife, or civil partner and their relatives).
- Relatives (including their husbands, wives, or civil partners).
- Business partners (and their husbands, wives, civil partners, and relatives).
A company is also connected with another company if:
- The same person controls them both.
- It is connected with a person who controls the other company.
- It is part of a group that controls both companies.
If the Original Claim was 100% of the Asset
What happens in cases where you ‘originally’ claimed 100% of the item? You should add the full value of the item to your profits in your tax return if both of these apply:
- You claimed 100% of the item in an annual investment allowance or in first year allowances.
- The business has nothing in the pool that the item qualifies for.
Note: This type of accounting is also known as making a ‘balancing charge’.
Having Balance in the Pool the Item Qualifies For
What if you claimed 100% of the item and have a balance in the pool the item qualifies for? In this case, you should deduct the full value from that pool.
Following that, add the difference to the profits in the tax return. This applies if the value of the asset is higher than the amount in the pool. This is the ‘balancing charge’. You can then claim writing down allowances on it if there is a balance left in the pool.
If You Used Writing Down Allowances
What happens if you used the ‘write down allowances‘ when you bought the item? You should deduct the value from the pool that you originally added the item to. The amount left over will be the amount you then use to work out the next writing down allowances.
What about items in single asset pools? You can claim any amount that gets left as a capital allowance. This procedure is also known as a ‘balancing allowance’.
The value you deduct may be more than the balance in the pool. In this case, add the difference to your profit. This is another balancing charge.
Note: You can only get a balancing allowance in the main or special rate pool if you close the business. But, you can get a balancing charge in any pool and in any year.
Selling an Asset for more than it Cost
Even if you sell the asset for more than it cost you must only deduct the original cost.
What if a connected person sold it to you for less than they paid for it? Deduct either the price you sell it for or the amount it cost them – whichever is less.
You must add the difference to the profits in a tax return if the value of the item is higher than the amount in the pool. This is would be another balancing charge.
If the Business Closes
The year that you close the business is key. You should enter a balancing charge or a balancing allowance on the tax return. This process would replace claiming capital allowances.