I have a client who has formed a limited company recently. This individual has some fixed assets (vans and machines) that had used while trading as a self employed individual.
Now I would like to introduce these tangibles into Ltd Co. Do I need to dispose of all of them first (from his previous company) and introduce to the new one, or can I only transfer them to the new Limited Co.? Do I need to apply balancing charges/allowances while performing this?
If the assets were in the sole trader accounts then you should dispose of them in the closing sole trader accounts. This may result in balancing charges/allowances in the tax computation. You can then introduce them into the limited company accounts using either the net book value or the tax written down value.
A balancing adjustment is a balancing charge or a balancing allowance. A balancing charge made on a person must not be more than the allowances made to that person.
FA07 changes
Broadly, FA07 abolished balancing adjustments apart from enterprise zone expenditure with a saving for pre-21 March 2007 contracts.
Here are details of the legislation.
There are no balancing adjustments for post-commencement balancing events on or after 21 March 2007 unless
the qualifying expenditure is qualifying enterprise expenditure, or
the balancing event is not a post-commencement balancing event.
A post-commencement balancing event is a balancing event that occurs on or after 21 March 2007 apart from an event that occurs before 1 April 2011 in pursuance of a relevant pre- commencement contract.
These are the conditions that have to be satisfied for a contract to be a relevant pre- commencement contract.
The contract is a contract made in writing before 21 March 2007,
the contract is unconditional or its conditions were satisfied before 21 March 2007,
no terms remain to be agreed on or after 21 March 2007, and
the contract is not varied in a significant way on or after 21 March 2007.
Example Warren holds the relevant interest in a factory in Soho in London that he occupies and uses for his trade of manufacturing werewolf costumes and other outfits. The factory is behind a Chinese restaurant . On14 March 2007 the Chinese restaurant catches fire and burns down. The fire damages the factory badly. Warren decides to have the factory demolished and the demolition takes place on 1 May 2007. The demolition of the factory is a balancing event. If a written contract for the demolition was entered into on or before 20 March 2007 Warren will be able to claim a balancing allowance because the contract is a relevant pre- commencement contract. If, however, Warren does not enter into the contract for the demolition of the factory until 28 March 2007 he cannot claim a balancing allowance. His IBAs will stop because the factory will no longer be in qualifying use but there is no balancing allowance.
Balancing adjustment
A balancing adjustment is made when IBA has been made on a building and there is then a balancing event. The balancing adjustment makes the allowances made equal the actual depreciation of the building while the person held the relevant interest in it. For example, if the building has increased in value the balancing adjustment recovers all the IBA that has been made.
The legislation in CAA01/S570A applies to prevent the making of a balancing allowance when the proceeds of the balancing event are affected by a tax avoidance scheme CA17000.
A balancing adjustment is made for the chargeable period in which the balancing event occurs. It cannot be made more than 25 years (50 years where the qualifying expenditure was incurred before 6 November 1962) after the building was first used.
A balancing event is:
the transfer of the relevant interest;
the coming to an end of a leasehold interest unless the person entitled to it acquires the interest which is reversionary on it;
the demolition or destruction of the building;
the building ceasing altogether to be used without being demolished or destroyed;
where the relevant interest depends on a foreign concession, the coming to an end of that foreign concession.
A foreign concession is a right or privilege granted by the government of, or any municipality or other authority in, a territory outside the UK.
You should remember that the transfer of the relevant interest includes the surrender of a lease for valuable consideration.
You may have a case where the owner of an industrial building dies. If the building is specifically bequeathed do not treat the temporary vesting of the property in the hands of the personal representatives as a balancing event. There is, however, a balancing event when the property is eventually transferred to the beneficiary. Treat the transfer to the beneficiary as taking place at market value unless there is an election to treat the sale as being for an alternative amount CA13200.
Apart from that exceptional case treat the vesting of the property in the hands of the personal representatives as a balancing event. Again, you should treat the transfer to the personal representatives as taking place at market value unless there is an election to treat the sale as being for an alternative amount CA13200.
You should only accept that a building has ceased altogether to be used if it can no longer be used for anything. Cessation of use as an industrial building is not enough. Examples of the sort of case where you can accept that a building has ceased altogether to be used are:
the building becoming derelict;
the building being condemned;
the building being due for demolition because it is in the path of a motorway.
A balancing adjustment may be made after a building has ceased to be an industrial building. If there is more than one balancing event of the type listed above after a building has ceased to be an industrial building a balancing adjustment is only made on the first one. This rule does not apply to other types of balancing event like the making of an additional VAT rebate CA39300. After a building has ceased to be an industrial building, the owner may receive an additional VAT rebate and then sell the building 2 years later. Both the receipt of the additional VAT rebate and the sale of the building are balancing events.
There is an additional balancing event for qualifying hotels. If there is a period of 2 years during which the building is not a qualifying hotel and there is no balancing event during that 2-year period, the hotel is treated as sold for its open market value at the end of the 2-year period. This means that there is a balancing adjustment at that point.
If a qualifying hotel becomes temporarily disused it is treated as a qualifying hotel for 2 years after the end of the chargeable period in which the temporary disuse begins. It is then no longer treated as a qualifying hotel and so there is a balancing adjustment if another 2 years go by without it becoming one again.
