If an asset for which AIA was previously claimed, is subsequently sold for more than the original cost, am I right in thinking that the balancing charge is limited to what was claimed originally?
The reason I am pondering this, is that my client has sold an item - part of the item was capitalised originally and AIA claimed accordingly. It is proving difficult to analyse the sale proceeds between the capitalised and non-capitalised element.
When I consider how much of the sales income to apportion to the capitalised element, my figures show that if I assign a figure greater than the original cost, then the result is higher retained profit for my client. Lets assume the asset has been sold for £1000 and that the original asset cost £300 (fully depreciated) and the cost of sales for the remaining element is £350. If I assign a value of £400 of the proceeds to the originally capitalised asset, the retained profit would be £600 income (non capitalised element of the sale), plus £400 profit on sale of asset, less cost of sales £350 less corp tax of £110 (income £600 less cost of sales £350 plus balancing charge limited to original cost £300 multiplied by 20%) i.e. £540
If however, I assign a lower value to the original asset, say £200, then the retained profit would be £800 income (non capitalised element of the sale) plus £200 profit on sale of asset, less cost of sales £350 less corp tax of £130 (income £800 less cost of sales £350 plus balancing charge equal to sales income of £200 multiplied by 20%) i.e. £520
I personally would first focus on the asset itself, not the effect of the PL reserve. I'd consider the elements that have been originally capitalised and taken to the PL.... What was the asset, why was it split £300/£350? What if this company was buying this asset from someone else, how would they decide how to split?
Also, is it your job to value it, or your clients?
