Balancing Charges & Allowances

Discussion in 'Askaboutbusiness' started by millertime, Jun 18, 2007.

  1. millertime

    millertime Frequent Poster

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    Can anyone tell me how to calculate Balancing charges and allowances?
     
  2. Nige

    Nige Frequent Poster

    Posts:
    1,032
    When you buy a business asset, you normally get capital allowances over 8 years. So, if you bought two machines four years ago for €5,000 each, the tax written down value (TWDV) (the cost less the capital allowances to date) would be €2,500 each (€5,000 - 625 -625-625-625).

    Now, if you sell machine A for €4,000 you will have a balancing charge to reclaim the "excess" allowances. The balancing charge is calculated as follows:

    sales proceeds: €4,000
    Less
    TWDV €2,500
    Balancing charge €1,500

    This balancing charge is subject to tax.

    If machine B is scrapped (no proceeds) you get an additional balancing allowance, which is treated as a normal capital allowance. The balancing allowance will be the difference between the TWDV and the proceeds (if any) and so, in this case will be €2,500.
     
  3. capall

    capall Frequent Poster

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    339
    Well explained above

    The idea I guess is that the revenue by giving you capital allowances is letting you claim a tax write off for the decline in value of your asset.
    If you can sell that asset at a price higher then its tax written down value then from their point of view they want their tax allowance back ,otherwise they are giving you a tax write off for an expense you haven't incurred

    Similarly you expect if you sell an asset for lower then its TWDV to get a tax deduction for this difference

    In effect the tax allowances are adjusted to reflect the actual real cost to the business
     
  4. millertime

    millertime Frequent Poster

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    234
    Thanks All :)