Profit on the Sale of Fixed Assets

How profits on the sale of fixed or tangible assets are calculated and their implications for profit and loss and taxation.

Profit on the Sale of a Fixed Asset

Fixed assets are pooled according to the rates of their capital allowances. The most common example of a pool is that of the main pool comprising plant and machinery, fixtures and fittings, office equipment, computers and commercial vehicles.

When a fixed asset is sold there are two possible profits that can arise; a capital profit and a taxable profit which is also known as a "balancing charge".

When forecasting using Figurewizard all that follows in the example below is automatically calculated and applied by the system.

Profit on Net Book Value

A profit on the sale of an asset does not arise unless its sales value is greater than the net book value (i.e. cost less depreciation) of its asset pool. That is known as a capital profit.

It will be shown in the profit an loss account as an "exceptional item". You can see an example of this on Figurewizard's sample profit and loss forecast.

A capital profit is not likely to be the only profit that will be recorded though.

The Balancing Charge

There is a second valuation of an asset pool known as the written down tax valuation. This is calculated as cost less capital allowances that have been set off against past taxable profits.

If the sale of an asset within the pool is also greater than its written down tax value (highly likely) a profit known as the balancing charge will have been created.

As with everything else Figurewizard will automatically calculate and apply these profits as and when they arise without any intervention from the user. What follows describes how a capital profit and a balancing charge are calculated.

Capital Profit on Net Book Asset Value

To begin with, consider the sale of a main pool asset for £1,000, where the net book value in the balance sheet of that pool is £3,000 cost minus £2,400 depreciation, leaving a balance of just £600.

Asset pool cost 3,000
less: Total depreciation charged 2,400
Net book value of the pool 600
Proceeds of sale of an asset 1,000
Net book profit 400

Asset Pools and Capital Allowances and Tax

Capital allowances substitute for depreciation when calculating the taxable profit so each year the annual depreciation is added back to year end profit. Capital allowances are then deducted from the taxable profit in place of the depreciation.

In their first year main pool assets will attract a 100% capital allowance known as the annual investment allowance (AIA) up to a maximum total value of £200,000 (2017). This is set off against the taxable profit. 

Thereafter if main pool purchases in a given year are greater then the £200,000 threshold, the balance will attract the smaller standard capital allowance, which in 2017 was 18% on a reducing balance for the main pool. Each year that follows will attract that 18% allowance and further reduce the pool's net taxable value. 

Given the scale of AIA over the last few years, virtualy all UK SMEs are likely to have a main asset pool of zero.

Taxable Profit on Written Down Tax Value

Where the sale proceeds of an asset is greater than the written down tax value (WDTV) of its pool, the subsequent tax profit is known as a "balancing charge". Using cost and sale as in the example above a balancing charge is calculated as follows:

Asset pool cost 3,000
less: Capital Allowances Claimed 2,950
Written down tax value 50
Proceeds of sale of an asset 1,000
Balancing Charge 950


This balancing charge of 950 will be added to the taxable profit instead of the net book profit of 400. The net book profit of 400 will however be recorded as an exceptional item (income) in the company's profit and loss statement.

Annual Investment Allowances and Company Cars

Note that company cars do not usually attract 100% annual investment allowances unless they are electric or have CO2 emissions of 75gm/km or lower.

Net book values, taxable profits, tax and cash flow forecasts arising from the sale of fixed assets are all automatically calculated and applied to Figurewizard forecasts. No intervention by the user is needed to do this. 

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