Hi there, thanks again for all the advice Ive been given on this forum.
A friend of mine has closed her cafe and sold the assets for 5K which are on the accounts as being worth £20k, she knows she cant claim depreciation for the year in which they are sold but how will she account for the difference ? She does her own tax returns and only has this one problem that Im aware of. Oh, its a partnership with her and her husband, in case thats relevant.
I assume that the assets have had capital allowances claimed on them over the years, the balance of which may well be a different balance to that on the BS in the accounts. Essentially on sale of the items, the balancing allowance will be claimed for the difference between the sale price and the amount left in the cap allow computations. If a profit was made, then a balancing charge will be made. You would need to see the capital allowance computations for the last year or so to work this out.
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
Hi, thanks for the response, capital allowances were claimed for, the figure I quoted of £20k is the nbv brought forward. So 15 k would go to balancing charges ?
Assuming she has an opening WDV in her accounts of £20k, it will be loss on disposal in the accounts. It then gets added back for the tax calculation.
The whole issue of whether or not to charge depreciation in the year of disposal - it doesn't make any difference to the tax calculation, for as you know, the tax relief is on the capital allowances.
Think you are confusing the accounting treatment with the tax treatment.
You have mentioned that the TWDV brought forward for tax purposes is 20k. If all the assets of the business are sold for 5k then will get capital allowances for the 15k difference which will be deducted for tax purposes.
What you dont mention is what the book value of the assets are in the accounts. This might be different from the TWDV of the assets. Will depend on the level of depreciation that has been claimed in the past.
If for instance your accounting profits are 30k before any depreciation/loss on disposal and the book value of the assets in the balance sheet is 25k. Given the assets have been sold for 5k you have effectively made a 20k loss on disposal which for accounting purposes will be shown in your accounts. For tax purposes any depreciation and loss/gain on disposal is removed from your accounting profit and instead you get capital allowances/balancing charges to work out your taxable profits. So in the example above
Accounting profit b4 disp 30k Less loss on disposal -20k
=Accounting profit in a/cs 10k
Add loss on disposal for tax purposes 20k
Less balancing allowance 20k TWDV - 5k 15k
= taxable profits 15k
So you can see your accounting profit is 10k but your taxable profits for working out your tax liability is 15k. This is because the book value of the asset on disposal is 25k but the tax value is 20k which means in earlier years you have already had the extra 5k as capital allowances above depreciation claimed which is why the taxable profits at the end are now 5k higher than the accounting profits.
It is due to being able to claim depreciation at different rates from the capital allowances you get. Depreciation isnt a tax allowable deduction but capital allowances are. It all comes out in the wash at the end of the day as you get full relief on the asset over the period of the business. What differs is the timing of when you get the relief compared to the depreciation you show on it.
