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

Selling a fixed asset means that two possible profits that can arise; a capital profit on written down net book value and a taxable profit on written down tax valuation; also known as a "balancing charge".

Capital Profits and Asset Pools

A capital profit depends on the net book value of its 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.

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 of the pool 600
Proceeds of sale of an asset 1,000
Net book profit 400

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

Fixed Assets as Exceptional Items

The operating profit of any business represents profit that has earned exclusively by its core trading activity. That is why profits from the sale of fixed assets are not included in it.

Profit arising from the sale of fixed assets are recorded as "exceptional items" as is revenue from investments, interest earned on deposits or surpluses arising from the revaluation of provisions, an example of which would be a provison for bad debts that turns out to have been overstated.

Taxable Profit - 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 written down tax valuation. This is calculated as cost less capital allowances that have been set off against past taxable profits.

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 one of its assets is sold for £1,000 taxable profit, known as a balancing charge arises 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

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.

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) up to a limit of £200,000 a year (2017 / 2018). AIA is then set off against the taxable profit. 

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) 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 over the last few years, virtually all UK SMEs are likely to have a main asset pool of zero.

As a result the written down tax value of main pool assets is going to be zero, meaning that the sale of any asset within the pool will generate a taxable balancing charge.

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.

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 Depreciation