How a Capital Loss can Turn into a Taxable Profit.
Fixed assets have two valuations, net book value and written down tax value (WDTV). Net book is calculated as cost less depreciation, WDTV as cost less capital allowances.
Depreciating Fixed Assets
The net book value of fixed assets is calculated as cost less depreciation. The rate of depreciation is determined by the estimated number of years for an asset's useful life.
When using Figurewizard to forecast profits, cash, tax and balance sheets and so on, straight line depreciation of fixed assets is always calculated and applied by the system without intervention by a user.
The value of fixed assets net of capital allowances is also calculated by our system, again without the need for user intervention.
Calculating Net Book Value Losses
In this example of a forecast net book loss, a computer has been purchased for £1,200, depreciated at 25% p.a. and sold after three years for £100. This produces a loss on its net book value as follows:
| Cost of Computer | £1,200 |
| less: Three Years Depreciation @ 25% | £900 |
| Net book Value after Three Years | £300 |
| Proceeds of Sale | £100 |
| Loss on Net Book Value | £200 |
That loss is set off against profits only after the operating profit has been calculated. It will not be recognised as a loss for tax purposes though as calculating profits or losses on the sale of fixed assets for tax purposes is a very different matter.
The Annual Investment Allowance and Capital Allowances
Fixed Assets are normally "pooled" depending on their rate of capital allowances.
New main pool assets (e.g. plant & machinery; office equipment; computers) attract an AIA (annual investment allowance) of 100% to be set off against the corporation tax charge in their first year of ownership, up to the following annual limits.
| AIA (Main pool assets) From & To | AIA Value |
| 1 January 2016 - 31 December 2018 | £200,000 |
| 1 January 2019 - 31 December 2020 | £1,000,000 |
| 1 January 2021 onwards | £200,000 |
If, in the unlikely event for most SMEs these limits are breached in any of the forecast years, the balance will attract a WDA (written down allowance) of 18% which is carried forward.
With 100% AIA relief being so high it is likely that most SMEs will have written down tax values for main pool assets of zero or at the worst, very low levels which is when a tax charge, known as the balancing charge on a sale comes in.
How to Calculate a Balancing Charge
As with everything else, what follows is automatically calculated by Figurewizard.
Assume that a). The forecast cost price value of main pool assets to be acquired (including our 1,200 computer) is 10,000 excl Vat and b). that the allowable 100% annual investment allowances have been claimed in the past.
For corporation tax purposes the sale of the computer now creates a tax profit known as a balancing charge instead of a tax loss as follows.
| Cost of main pool assets | £10,000 |
| less: Annual investment allowance | £10,000 |
| Written down tax value of the pool | £0 |
| Proceeds of Sale of the Computer | £100 |
| Balancing Charge (taxable) | £100 |
For working examples of tax, fixed asset, profits, and cash flow forecasts follow the links below. Sample forecasts are live working examples that can either be edited or better still changed using the What-If calculator to view the results in on everything in real time.
What happens if I give a fixed asset away FOC instead?
You pay anyway. The value of the asset that has been given away then becomes the balancing charge.