Something a closing business needs to calculate when selling or writing off a fixed asset for tax deductibles.
Balancing Allowance Details
A balancing allowance (BA) is a tax-deductible amount in certain countries such as England, Singapore, and Ireland. It is calculated when your fixed assets are sold or written off. Examples of asset disposing of include:
- Getting compensation like an insurance payout
- No longer using it in your business
- Swapping it for something else
A balance allowance is a type of capital allowance, which is a deductible you can claim for the depreciation of qualifying fixed assets; in other words, it's wear and tear. The aim is to provide relief equal to the actual value reduction during the period of ownership. You can make capital allowance claims for assets bought from the date your business started. Assets bought beforehand can only be claimed if they were necessary for your business to operate.
A balance allowance will generally apply when your business comes to an end. The deduction will be for your income profits of the year your business activities discontinue.
Example of Balancing Allowance
Examples of fixed assets that qualify for a capital allowance are office equipment, furniture, industrial equipment, vehicles, and signboards. These assets are generally items you keep to use in your business.
You calculate a balance allowance by finding the difference between the tax written down value (TWDV) and the sale proceeds of an item. An example is if you sell an office desk. If a 4,000 dollar office desk has a TWDV of 1,000 and you receive sale proceeds of 400 dollars, the balancing allowance will be 600 dollars.
Types of Balancing Allowance
You can group capital allowances into three different pools depending on their qualifying claim rate. The type of item you are calculating a balance allowance for will determine the pool it belongs in. The three pools and their rates in the United Kingdom are the following:
- Main pool (18 percent rate)
- Special rate pool (6 percent rate)
- Single asset pool (18 or 6 percent rate, depending on the item).
The main pool is for all major equipment except those that fall in the special rate and single asset pools. The special rate pool is for certain building fixtures, long-life assets, and cars with high carbon dioxide emissions. Items in the single asset pool are for equipment used for both business and private purposes. Balancing allowances are not allowed for structures, buildings, research, or development.
History of Balancing Allowance
In 1945, an Income Tax Act established a capital allowances system to support the British industry's reconstruction after World War II. This initial system was replaced in 1946 to include initial allowances, writing-down allowances (WDA), balancing allowances (BA), and balancing charges (BC).
In 1984, business tax reforms set allowances closer to their rates of commercial depreciation. The British government set plant and machinery allowances at 25 percent and industrial and agricultural buildings at 4 percent. In 1985, short-life assets sold or disposed of within four years would be given a balancing allowance so claims would correspond with actual economic depreciation rates. In 2008, an Annual Investment Allowance (AIA) was introduced that allowed a 100 percent allowance for expenditure on plant and machinery (except cars) up to a maximum amount.
Balancing Allowance vs. Balancing Charge
If you have previously claimed capital allowance on an asset, you need to calculate the balancing charge (BC). Previous claims can be through other capital allowance methods such as a writing down allowance (WDA) or first-year allowance (FYA). You will calculate a balancing allowance (BA) when selling or writing off a fixed asset. A BC is a taxable income, but a BA is tax-deductible.
Both BA and BC are the difference between the tax written down value (TWDV) and the sale proceeds. However, you will calculate a BA if the sale proceeds are lower than the TWDV and calculate a BC if the sale proceeds are higher than the TWDV.