288 Balancing allowances and balancing charges

Summary

A balancing charge or allowance (that is, an adjustment to the quantum of the allowances made) may arise in a chargeable period where any of the following events occurs in relation to any machinery or plant in respect of which capital allowances have been obtained by a person carrying on a trade —

• the machinery or plant ceases to belong to the person whether on a sale or otherwise,
• the machinery or plant ceases to be used for the purposes of the trade,
• the trade permanently ceases, or
• in the case of machinery or plant consisting of a specified intangible asset, computer software or the right to use or otherwise deal with computer software, the granting to another person of a right to use or otherwise deal with all or part of the software concerned.

Where any of the above events occurs —

• a balancing allowance arises where the amount of the capital expenditure still unallowed (that is, the unused capital allowances) in respect of the machinery or plant is greater than the sale, insurance, salvage or compensation moneys received for the machinery or plant, and
• a balancing charge arises where the amount of the sale, insurance, salvage or compensation moneys received exceed the unused capital allowances in respect of the machinery or plant, except (other than where the machinery or plant is disposed of to a connected person) where the amount of those moneys is less than €2,000.

Special apportionment rules apply where the balancing event arises as a result of granting a right to use or otherwise deal with all or part of machinery or plant which consists of computer software or the right to use or otherwise deal with computer software (see subsection (3A)).

In the case of a disposal of a specified intangible asset within the meaning of section 291A, a balancing charge will not arise in certain circumstances (see subsection (3C)).

Details

Events giving rise to a balancing allowance or charge

(1) Where an initial allowance or a wear and tear allowance in respect of machinery or plant has been made for any chargeable period to a person carrying on a trade, a balancing allowance or charge will arise in relation to the machinery or plant on the occurrence of any of the following events —

• while the trade is being carried on the machinery or plant ceases to belong to the trader (for example, by reason of its being sold or given away),
• where the machinery or plant permanently ceases to be used for the purposes of the trade (for example, where it is put out of use altogether, or transferred to private use or to use in another trade carried on by the same person),
• where the trade is permanently discontinued (by virtue of section 320(5), this includes a case in which the trade is for tax purposes treated as having been discontinued), or
• in the case of machinery or plant consisting of computer software or the right to use or otherwise deal with computer software (see section 291), where the person grants to another person the right to use or otherwise deal with all or part of the machinery or plant concerned in circumstances such that the consideration in money for the grant constitutes (or, if there were consideration in money, would constitute) a capital sum.

The balancing allowance or balancing charge is made to or on the person concerned for the chargeable period related to the event, that is, in the case of corporation tax, for the accounting period in which the event occurred and, in the case of income tax, for the year of assessment in the basis period for which the event occurred.

Balancing allowance

(2) In the case where there are no sale, insurance, salvage or compensation moneys (defined in section 318) or where the capital expenditure on the machinery or plant which is still unallowed at the time of the event (see section 292) exceeds any such moneys received, a balancing allowance is made. The amount of the allowance is an amount equal to the amount of the unallowed expenditure less the sale, insurance, salvage or compensation moneys (if any) received.

Balancing charge

(3) Where the sale, insurance, salvage or compensation moneys received in respect of the machinery or plant exceed the unallowed expenditure, if any, a balancing charge is made. The amount of the charge is subject to subsections (3A), (3B) and (3C) an amount equal to the excess of such moneys over the unallowed expenditure.

Apportionment in the case of computer software

(3A) With effect from 29 February 2000 special apportionment rules apply where a balancing allowance or balancing charge is to be made which arises as a result of the granting of a right to use or otherwise deal with all or part of machinery or plant which consists of computer software or the right to use or otherwise deal with computer software. These rules apply where the person granting the right to use etc. retains an interest in the machinery or plant.

Firstly, the amount of the unallowed capital expenditure relating to the machinery or plant in question is apportioned. The portion which the sale, insurance, salvage or compensation moneys bear to the aggregate of the sale etc. moneys and the market value of the machinery or plant which remains undisposed of, is taken into account in calculating the balancing allowance or charge arising as a result of the grant of the right to use etc. The balance is attributed to the machinery or plant which remains undisposed of.

Secondly, the amount of the original capital expenditure incurred on the machinery or plant in question is reduced by the portion which the sale etc. moneys bear to the aggregate of the sale etc. moneys and the market value of the machinery or plant which remains undisposed of. As a result, any further capital allowances to be made in respect of the computer software will be based on this reduced figure.

The effect of these rules and that in subsection (4)(c) is to effectively treat the original computer software held and the right to use etc. which is granted as two separate assets. This is illustrated in the following example:

No balancing charge where “sale proceeds” less than €2,000

(3B) With effect from 1 January 2002 no balancing charge will arise in respect of plant and machinery where the sale, insurance, salvage or compensation moneys for the plant or machinery is less than €2,000. This relaxation of the balancing charge rules will not apply in cases where plant and machinery is disposed of between connected persons (see section 10).

No balancing charge on disposal of “specified intangible assets” in certain circum-stances

(3C) In the case of a specified intangible asset within the meaning of section 291A, where expenditure was incurred on the provision of an asset before 14 October 2020, no balancing charge will arise if, in relation to the asset, an event referred to in subsection (1) (including a disposal of the asset) occurs more than five years after the beginning of the accounting period of the company in which the asset was first provided. This is subject to the condition that the event may not result in a connected company claiming allowances under section 291A in excess of the tax written down value of the asset at the time of transfer (i.e. the amount of unclaimed allowances).

Limit on balancing charge

(4)(a) & (b) A balancing charge to be made on a person cannot exceed the aggregate of the amounts of any initial allowance, wear and tear allowances, scientific research allowance and previous balancing allowances made to the person in respect of the machinery or plant. A balancing charge, therefore, does not extend to any excess of sale, insurance, salvage or compensation moneys over the original cost of the asset.

(4)(c) Where subsection (3A) applies then, for the purposes of the Chapter, the allowances mentioned above which are granted in respect of the machinery or plant in question (which consists of computer software or the right to use or otherwise deal with computer software) are apportioned so that:

• the portion of the allowances which the sale, insurance, salvage or compensation moneys bear to the aggregate of those moneys and the market value of the machinery or plant in question which remains un-disposed, are attributed to the grant of the right to use or otherwise deal with the computer software.
• the balance is attributed to the machinery or plant in question which remains undisposed.

Balancing adjustments and treatment of grants

(5)(a) Subject to certain exceptions, capital allowances in respect of machinery or plant are now given by reference to the capital expenditure incurred on a net of grant basis, that is, the grant is deducted in determining the expenditure qualifying for allowances. (See section 317 for details of this rule and the exceptions to it.) Where an initial allowance and wear and tear allowances are made on a gross basis (that is, the grant was not deducted in determining the allowable expenditure), then, by virtue of section 317(2), in calculating a balancing adjustment, the amount of the grant is deducted from the original cost of the machinery or plant in determining under section 292 the amount of the expenditure unallowed.

A special measure is needed, however, to cater for the case where the allowances were made on a gross basis and the aggregate of the initial allowance and wear and tear allowances made exceed the actual expenditure incurred by the person on the provision of the machinery or plant. On the occurrence of a balancing event in any such case, the excess of the allowances made over the actual expenditure incurred is treated as sale, insurance, salvage or compensation moneys, and this gives rise to a balancing charge. The amount on which the charge is made is —

• where there are no actual sale, insurance, salvage or compensation moneys, the amount of that excess, and
• where there are actual sale, insurance, salvage or compensation moneys, the amount of that excess plus the amount of those moneys.

Successive balancing events

(5)(b) Where a balancing event in relation to machinery or plant occurs and is followed by another balancing event, any balancing allowance or charge to be made on the person on the later event must take account of any balancing allowance or charge previously made on the person in respect of the expenditure incurred on the provision of the machinery or plant. In effect, any previous allowance or charge must be deducted or as the case may be, added in determining the amount of the expenditure still unallowed for the purposes of calculating the allowance or charge to be made on the later event. Successive balancing adjustments could arise, for example, if the person ceased to use the machinery or plant for one trade and then used it for another trade.

Balancing charges and decommissioning of fishing vessels

(6) A grant may be paid to a person under the scheme for compensation in respect of the decommissioning of fishing vessels implemented by the Minister for the Marine and Natural Resources under European Council Regulation No. 3699/93. Any balancing charge arising as the result of the receipt of such a grant may be spread in equal instalments over 3 chargeable periods, instead of being levied in full for the chargeable period in which the grant is received.

(6A) This scheme has been superseded by a new one implemented by the Minister for Agriculture, Food and the Marine under European Council Regulation (EU) No. 508/2014. As with the previous scheme any balancing charge arising as a result of the receipt of a decommissioning payment will be spread evenly over 5 chargeable periods, the first in the year of receipt and the following 4 periods. This provision is subject to commencement order by the Minister for Finance with the consent of the Minister for Agriculture, Food and the Marine.

Relevant Date: Finance Act 2021