Loss on the Sale of Fixed Assets

Selling a fixed asset at a loss on net book value shows as a loss in profit and loss but it can still create a taxable profit HMRC calls a balancing charge

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.

For example if the useful life of a fixed asset is estimated to be four years, it will be depreciated at an annual rate of 25% and for ten years at 10%. Its balance sheet value net of depreciation is known as its net book value.

When calculating profit, cash flows and balance sheet forecasts for you, Figurewizard  uses straight line depreciation. 

Calculating Net Book Value Losses

For example take a computer, purchased for £1,200 depreciated at 25% p.a. and sold after three years for £100. This will produce 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.

Asset Pools, Losses and Tax

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 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 possible tax charge on a sale comes in. 

How to Calculate a Balancing Charge

Assume that a). The cost price value of main pool assets 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, profits and fixed asset forecasts follow the links below or better still use the What-If calculator.

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