Loss on the Sale of Fixed Assets

Selling a fixed asset at a loss on its net book value often results in an HMRC balancing charge for corporation tax on all of the proceeds of sale.

How a Capital Loss can Turn into a Taxable Profit.

Fixed assets have two valuations, net book value and written down tax value (WDTV).  Net book is calculated as cost less depreciation, WDTV as cost less capital allowances.

Depreciating Fixed Assets

The net book value of fixed assets is calculated as cost less depreciation. The rate of depreciation is determined by the estimated number of years for an asset's useful life.

When using Figurewizard to forecast profits, cash, tax and balance sheets and so on, straight line depreciation of fixed assets is always calculated and applied by the system without intervention by a user.

The value of fixed assets net of capital allowances is also calculated by our system, again without the need for user intervention.

Calculating Net Book Value Losses

In this example of a forecast net book loss, a computer has been purchased for £1,200, depreciated at 25% p.a. and sold after three years for £100. This produces a loss on its net book value as follows:

Cost of Computer £1,200
less: Three Years Depreciation @ 25% £900
Net book Value after Three Years £300
Proceeds of Sale £100
Loss on Net Book Value £200

That loss is set off against profits only after the operating profit has been calculated. It will not be recognised as a loss for tax purposes though as calculating profits or losses on the sale of fixed assets for tax purposes is a very different matter.

The Annual Investment Allowance and Capital Allowances

Fixed Assets are normally "pooled" depending on their rate of capital allowances.

New main pool assets (e.g. plant & machinery; office equipment; computers) attract an AIA (annual investment allowance) of 100% to be set off against the corporation tax charge in their first year of ownership, up to the following annual limits.

 AIA (Main pool assets) From & To AIA Value
1 January 2016 - 31 December 2018 £200,000
1 January 2019 - 31 December 2020 £1,000,000
1 January 2021 onwards £200,000

If, in the unlikely event for most SMEs these limits are breached in any of the forecast years, the balance will attract a WDA (written down allowance) of 18% which is carried forward.

With 100% AIA relief being so high it is likely that most SMEs will have written down tax values for main pool assets of zero or at the worst, very low levels which is when a tax charge, known as the balancing charge on a sale comes in. 

How to Calculate a Balancing Charge

As with everything else, what follows is automatically calculated by Figurewizard.

Assume that a). The forecast cost price value of main pool assets to be acquired (including our 1,200 computer) is 10,000 excl Vat and b). that the allowable 100% annual investment allowances have been claimed in the past.

For corporation tax purposes the sale of the computer now creates a tax profit known as a balancing charge instead of a tax loss as follows.

Cost of main pool assets £10,000
less: Annual investment allowance £10,000
Written down tax value of the pool £0
Proceeds of Sale of the Computer £100
Balancing Charge (taxable) £100

For working examples of tax, fixed asset, profits, and cash flow forecasts follow the links below. Sample forecasts are live working examples that can either be edited or better still changed using the What-If calculator to view the results in on everything in real time.

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