Hi - I have a query regarding the situation when an asset is disposed of for which 100% Annual Investment Allowance was claimed in the year of purchase. My query is with regard to the balancing charge when the item has been fully depreciated in the accounts. Lets use the example of a van costing £6000 bought in 2007 for which the AIA was claimed. The van was depreciated over 3 years at £2000 a year. This has now been sold in 2011 for £1500. What is the balancing charge? Reading the HMRC guidance would suggest that as the allowance pool is nil b/f, then the £1500 would be the balancing charge, however this doesn't make sense to me as although £6000 AIA was claimed originally, the deprecation obviously disallowed when calculating corporation tax has amounted to £6000 so in my mind we are even. Could anyone please clarify the situation for me?
Firstly, ignore depreciation. It has nothing to do with the AIA.
Secondly, the asset was purchased for £6,000 and sold for £1,500, therefore the total available for tax relief is £4,500. This was £6,000 at the start, but £1,500 is now a balancing charge.
Thirdly, the AIA came into force in April 2008 (I think!), so presume the purchase was in a year straddling this date?
Just reiterating the response from gbm. Just to explain the treatment of depreciation a little further though - depreciation is added back to the profit before corporation tax is calculated, so you only get the tax relief on the AIA and not on the depreciation.
Hiya - thanks for your prompt reply. This was just an example so the date isn't relevant. I just wanted to understand the workings of it. I will take your advice and ensure that any assets sold have as a balancing charge the proceeds of the sale.
Another question - if an asset is merely disposed of without any proceeds of sale, say for example an item gets broken, I presume there is no balancing charge in that case?
