Balancing Charges & Allowances

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

1. millertimeFrequent Poster

Posts:
232
Can anyone tell me how to calculate Balancing charges and allowances?

2. NigeFrequent 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. capallFrequent Poster

Posts:
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

Posts:
232
Thanks All