Balancing Charge Defined
A balancing charge is the amount that may be subject to corporation tax when a company disposes of an asset and the proceeds from the sale exceed the asset’s written-down value for tax purposes. The purpose of the balancing charge is to adjust for any excess amounts realized which had previously not been taxed due to depreciation or other allowances.
The balancing charge is calculated as the difference between the proceeds from the disposal and the written-down value. For example, if the written-down value of an asset is £23,000 and the disposal proceeds amount to £30,000, the balancing charge would be the difference of £7,000. This amount is then incorporated into the tax calculations for the accounting period.
1Written-down Value: £23,000
2Disposal Proceeds: £30,000
3Balancing Charge: £30,000 - £23,000 = £7,000
If the balancing charge exceeds available allowances for the period, the net amount is added to the profit for the period and becomes subject to corporation tax.
Examples
Example 1: Machinery Sale
- Written-down Value: £10,000
- Disposal Proceeds: £15,000
- Balancing Charge: £15,000 - £10,000 = £5,000
Example 2: Vehicle Disposal
- Written-down Value: £8,000
- Disposal Proceeds: £9,500
- Balancing Charge: £9,500 - £8,000 = £1,500
Frequently Asked Questions
What is a balancing charge?
A balancing charge arises when the proceeds from disposing of an asset exceed its written-down value for tax purposes, thereby adjusting any previously uncharged amounts back into taxable profits.
Why do we have balancing charges?
Balancing charges help ensure that the tax relief previously given on capital allowances is adjusted when an asset is sold for more than its tax-depreciated value.
Are balancing charges only relevant to corporation tax?
While balancing charges are most commonly associated with corporation tax, they can also be applicable to other tax scenarios involving the disposal of capital assets.
How does a balancing charge impact financial statements?
Balancing charges increase the taxable income for the period due to the additional amount added to the profit for tax computations.
What is the difference between a balancing allowance and a balancing charge?
A balancing charge arises when proceeds exceed written-down value, while a balancing allowance occurs when disposal proceeds are less than the written-down value, providing additional relief.
Related Terms
Written-Down Value
The value of an asset after accounting for depreciation and other allowances.
Corporation Tax
A tax on the profits of corporations that is imposed by government authorities.
Disposal of Asset
The act of selling or otherwise disposing of an asset, which can trigger tax events like balancing charges or allowances.
Online References
- Investopedia on Capital Allowances
- HMRC Balancing Charges Guidance
- Taxation of Asset Disposals: A Comprehensive Guide
Suggested Books for Further Studies
- “Taxation of Company Reorganizations” by Peter H. Blessing
- Detailed coverage of corporation tax including asset disposals and balancing charges.
- “Fundamentals of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Alan J. Marcus
- Basic principles that underlie corporate finance and tax implications.
- “Taxation Principles and Practice” by Andy Lymer and Lyndon Knapp
- Comprehensive introduction to taxation, capital allowances, and balancing charges.
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