State all circumstances in which a Balancing Charge or Balancing

allowances can arise in respect of an item of plant or machinery eligible for

capital allowances

• The different types of capital allowances each have their own rules and rates

• Capital allowances can be claimed for expenditure on:

- Plant and machinery (P&M).• Companies, but not individuals and

partnerships, can get tax relief for purchases of intellectual property, goodwill and other intangible assets.

Capital allowancesCapital allowances can be claimed by:• Companies.• Sole traders and trading partnerships.• Landlords.• Employees, in some circumstance• Allowances are normally given as a deduction in

calculating trading profits or the profits of a• property letting business. They are given in

respect of a ‘chargeable period’, which for a company is its accounting period, and for sole traders and partnerships is a ‘period of account’.

Plant and Machinery Allowances• Capital Allowances for Plant and Machinery fall

under the following categories:- • Initial allowance (IA) - this is given once, for the

Year of Assessment relating to the basis period in which the qualifying capital expenditure is incurred.

• Annual allowance (AA) - this is given each year commencing from the Year of Assessment relating to the basis period in which the qualifying capital expenditure is incur

• Balancing allowance - where an asset is disposed of and the disposal proceeds are less ed. than the tax written down value of the asset, the disposer is entitled to claim the difference as a balancing allowance.

Balancing charge

• Balancing charge - conversely where an asset is disposed of and the disposal proceeds are more than the tax written down value of the asset, the difference will be imposed on the disposer as a balancing charge. The balancing charge is restricted to the total capital allowances claimed by the disposer.

• For example, we can claim allowances, called Plant and Machinery Allowances for the cost of vans, cars machines, equipment, tools, furniture, computers and similar items which have bought and which have been use in our business

• We may be eligible to claim one or more different allowances but cannot claim more than one allowance for the same expenditure. We can choose whether or not to claim and which allowances that we wish to claim.

• We do not have to claim the full amount of the allowance but you must specify the amount you wish to claim on your return.

• The “normal” allowance is a writing down allowance of 18%, or a special pool writing down allowance of 8%. But there is currently a much more beneficial allowance available: the annual investment allowance.

Example 1• Austra Mats Sdn Bhd provides floor mat renting

service which receives fees for the rental and service of cleaning floor mats. The life span of a floor mat is between three to five years. The rental sum is based on the agreement in the contract.

• The floor mat functioned as a tool in the company's business activity and it is also a fixed asset of the company. Thus, the floor mat is a plant and is eligible for capital allowances

Example 2• Erantik Sdn Bhd purchased antiques for exhibitions in

its museum. The public are required to buy tickets to enter the museum. The company reported the purchase of the antiques as business assets and claimed capital allowances in respect of the assets.

• The antiques functioned as tools for the company to carry out the exhibitions. They are used in producing income for the company. Thus, the antiques is a plant and are eligible for capital allowances

• The balancing charge is restricted to the total capital allowances claimed by the disposer

• Allowances made under paragraph 34 and charges made under paragraph 35 shall be known as balancing allowances and balancing charges respectively

• Subject to this Schedule, where in the basis period for a year of assessment a person disposes of an asset in relation to which he has incurred qualifying expenditure for the purposes of a business of his and its disposal value exceeds the residual expenditure at the date of its disposal, there shall be made on him in relation to that business source for that year a charge equal to the amount of the excess

• Provided that no charge shall be made on him under this paragraph if that asset is an industrial building and it is disposed of by him after the basis period (in relation to that business) for the year of assessment which is the fiftieth year of assessment after the year of assessment in the basis year for which that building was constructed.

• No allowance shall be made for a year of assessment under paragraph 34 to a person in relation to an asset which has been disposed of unless an initial or annual allowance in relation to that asset has been made or would have been made, if claimed, to him

• Generally, anything we use that has a useful economic life of at least two years may qualify for capital allowances.

• Capital allowances do not apply to items that we trade to buy and sell as these items are included in business expenses

• We cannot claim capital allowance for plant and machinery (such as furniture and fixtures and equipment) for use in a dwelling house if we have a property rental business unless it qualifies as a furnished holiday lettings business

What happens when I sell an asset that I previously obtained 100% allowances for?

• These will be assets that would ordinarily have formed part of the general pool, so the proceeds should go through the general pool. If that makes the balance on the main pool negative, then instead of a capital allowance, a balancing charge has been generated and that is an amount that is added to profits rather than being deducted from them.

Example• Brenda has a main pool balance brought forward of

£5,500 at 6 April 2014. During the year 2014/15 she sells a low-emission car for £7,200. That car previously attracted a 100% allowance.

• Written down value brought forward £5,500 Less: sold £7,200 Balancing charge £1,700 Thus Brenda has £1,700 to add to her profits for 2014/15.

• Balancing allowances or charges may be triggered when a taxpayer disposes of a qualifying capital item (such as industrial buildings, plant, and machinery, among others).

• However, the amount of balancing charges to be imposed will be limited to the amount of capital allowance claimed on the asset prior to its disposal.

• The provisions on balancing allowances, balancing charges and claw-backs will be applicable unless the disposal falls within the controlled transfer provisions in the ITA. In a controlled transfer situation, the assets are deemed to be transferred at their respective residual values such that no balancing charges or allowances will arise.

A controlled transfer situation arises when: • the disposer of the asset is a person over whom the

acquirer of the asset has control; • the acquirer of the asset is a person over whom the

disposer of the asset has control; • some other person has control over the disposer

and the acquirer of the asset; • the disposal is effected as a result of a plan of

reconstruction or amalgamation of companies; or • the disposal is effected by way of a settlement, or

gifts, or by devolution of the property in the asset on death.