A common occurrence in trading businesses is sale of plant & machinery or vehicles used in the business. Rules shown below are applicable both in moveable and fixed plant & machinery for a business following accrual based accounting , for business following cash basis see Bonus point 4 below.
Two scenarios could happen:
- Disposal proceeds are less than purchase cost – a loss (usual case)
- Disposal proceeds are less than purchase cost – gain
We will try to explain these scenarios, by way of an example.
We need to prepare two calculations – one for capital allowance (CA) and other for capital gains.
X is an individual trader for many years. He brings forward main pool expenditure of £40k. In year 1, he buys a van for £20k and a computer for £5k. He claims AIA on all expenditure. In year 2, he sells the van for £12k and the computer for £8k.
We have illustrated below, how these transactions will affect the Capital Allowance and Capital Gains calculations.
Capital Allowance calculation
Year 1 Main pool
WDV b/fwd 40,000
Additions 25,000
AIA 25,000
40,000
WDV 18% 7,200
WDV c/fwd 32,800
Year 2
WDV b/fwd 32,800
Disposal value 17,000 a
15,800
WDV 18% 2,844
WDV c/fwd 12,956
a. Disposal value = £12k (van) plus £5k (computer), as disposal value is restricted to original purchase cost.
Capital Gains Calculation
Capital gains is only applied on assets if sold above its original purchase price. Thus, van is ignored for Capital Gains.
Computer b
Disposal proceeds 8,000
Purchase cost c 5,000
Unindexed Gain 3,000
Indexation allowance (estimated) (500)
Indexed Gain 2,500
Note:
b. Gain or loss is computed on each asset individually.
c. Capital allowance taken on assets are completely ignored. TCGA 1992 sec 41
Practice notes:
- We should keep note of each item added to the pool – date added/purchased and amount added. Date is important as companies get indexation allowance for items purchased before 31st December 2017. Usually, commercial tax filing software will have the facility to record assets individually and calculate indexation allowance.
Source:
- Book – Taxation by Alan Melville
- Book – Tolley’s Tax Guide para 22.19, 22.46 and 38.4
Bonus:
1. In case X sells a table to his friend for £1k (market value £2k). Disposal value will be £1k if his friend runs a trading business where he can claim Capital Allowances . In case his friend does not run a trading business and cannot claim Capital allowances disposal value will be £2k.
2. In case X gifts the table to his employee, disposal value will be nil. But tax maybe payable by employee under ITEPA 2003.
3. In case X gifts the table to his brother, disposal value will be £2k (market value).
See HMRC Manual CA23250 on disposal values.
4. For business following cash basis accounting – When a asset is disposed off for more than its purchase price, business owner will be taxable on the full disposal value even if it is higher than purchase price. Source ICAEW Tax guide 04/24.
Roy Accountants 