Balancing Charges & Allowances

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

  1. millertime

    millertime Frequent Poster

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

    Nige Frequent Poster

    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
    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

    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

    Thanks All :)