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

This is how net book and taxable profits arise from the sale of fixed asset. When using Figurewizard to plan profits, cash and so on, such profits and their taxes are recognised and calculated and applied automatically to forecasts by our system.

Selling fixed assets usully result in two different profits. The first and most unlikely is selling a fixed asset at more than net book value (i.e. net of depreciation), the other and much more likely is on its written down tax value. 

For the average SME, it is highly likely that even when selling a fixed asset at a loss against in its net book value it will still result in a taxable profit having been created.

Net book value represents the depreciated useful working life of an asset but HMRC does not recognise that as a taxable profit. For the purposes of taxation it is a tax profit, known as a "balancing charge" upon which a company's corporation tax liability is assessed.

How to Calculate a Profit on Net Book Value

A capital 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 entire asset pool. 

In this example a main pool asset is sold for £1,000, where the net book value of the pool is £600.

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

That capital profit will be shown in the profit and loss forecast by Figurewizard as an "exceptional item". However a capital profit is not likely to be the only profit to be recorded as what follows describes.

The Balancing Charge

Corporation tax is not charged on profits arising from an asset pool's net book value. 

That is because there is a second valuation of an asset pool known as its WDTV (written down tax valuation). It is calculated as cost less capital allowances and that is what represents the balancing charge.

Taxable Profit - How to Calculate the Balancing Charge

In the following example, the asset pool cost of £3,000 has attracted £2,950 in capital allowances during its lifetime in the business, leaving a written down tax value of £50.

If we assume that the asset sold for £1,000 taxable profit is the only one in the pool that has not been written down to zero, a balancing charge arises as follows.

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

The balancing charge of £950 will be added to the taxable profit and taxed accordingly.

As with the capital profit, any balancing charge that may arise when working with Figurewizard is automatically calculated and applied. How the corporation tax charge is calculated can be viewed in the Figurewizard corporation tax forecast.

How Figurewizard Budgets Fixed Assets

Both the acquisition and sale of fixed assets are budgeted by Figurewizard. For example if in year one you enter £9,000 as your forecast for new main pool assets, they are accrued over the first twelve months.

That means the value of those new assets will be shown as £750 for month 1, £1,500 for month 2, £2,250 for month 3 and so on until the end of the year when the total will have reached £9000.

Sales of fixed assets are budgeted in the same way.

Capital Profits and Asset Pools

A capital profit depends on the cost less depreciation (net book value) of its asset pool at the time of the sale.

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.

If the value of a sale is greater than the net book value of its pool, a capital profit is created. While capital profits are not common, for the average SME a taxable profit (balancing charge) on the sale of a fixed asset is highly likely.

When forecasting using Figurewizard everything in the two examples below is automatically calculated and applied by its system.

Fixed Assets as Exceptional Items

The operating profit of any business represents profit that has earned exclusively by its core trading activity. As profits from the sale of fixed assets are not connected with core trading activity, they are excluded.

This is the reason for profit arising from the sale of fixed assets being recorded as an "exceptional item" as are revenues from investments, interest earned on deposits or surpluses arising from the revaluation of provisions. A common example of a provision is for bad debts which turns out to have been overstated.

Fixed Assets - Annual Investment Allowance

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

In their first-year main pool assets will attract a 100% capital allowance known as the annual investment allowance (AIA) which is currently set at £1,million. It is therefore very likely that for the average SME the sale of any main pool asset is likely to ceate a balancing charge.

Fixed Assets - Standard Capital Allowance

If the purchase of new main pool purchases in a given year is greater than the 100%  threshold (£200,000 2017 / 2018 - £1 million 2020 / 2021) the balance will attract the smaller standard capital allowance. In 2017 / 2018 this allowance is 18% of the cost excluding VAT on a reducing balance for the main pool.

In subsequent years the balance will attract a further 18% allowance to be set off against profit while reducing the written down tax balance carried forward.

Given the scale of AIA however, virtually all UK SMEs are likely to have a written down tax value (WDTV) for main pool assets of zero.

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.

Most company cars will therefore not qualify for an annual investment alowance. Instead there is only a capital allowance of the company car pool of 8% a year on a reducing balance.

Unusually VAT on company cars is not recoverable from HMRC as input tax. As a result when forecasting with Figurewizard you are guided to enter their value including VAT. In addition  when company cars are sold, Figurwizard does not add VAT to the transaction.

Figurewizard and Disposal of Fixed Assets

Anyything else is entered excluding VAT, which is also automatically added by Figurewizard when anything else is sold.

Eveything, including net book values, taxable profits, tax and cash flow forecasts arising from the sale of fixed assets are part of Figurewizard' s automatic calculations which are then applied to forecasts. No intervention by the user for anything is called for. 

For more follow the links below

Corporation Tax and Marginal Relief From 2023 Deferred Income Explained What is a Monthly Cash Flow Forecast What is Pretax Profit How does a balance sheet balance? Lockdown Recovery: Forecasting Profits, Cash and Finance. How to Apply for Business Interruption Scheme with Figurewizard How to calculate liquidity and short-term liquidity How to calculate markup and margin The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 How to make profits and not run out of cash Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow? What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions How Depreciation is Calculated What is Business Operating Activity What are Fixed Assets Liquidity and Cash Flow Balance Sheet Liabilities and Leases Stock or Inventory Control What is Distressed Stock or Inventory What is Interest Suspense Account Product Safety Laws What is a Bill of Exchange What is Payment at Sight What is a Pro Forma Invoice What is a Bill of Lading What is a packing note What is Demurrage Cash Flow Forecasts and Planning Factoring: Invoice Discounting and Cash Flow How Does VAT Work Figurewizard as a Sales Aid for Factoring and Invoice Discounting