289 Calculation of balancing allowances and balancing charges in certain cases

Summary

Generally, the sale, insurance, salvage or compensation moneys received are used in computing a balancing allowance or charge in respect of machinery or plant. This section provides that in cases where there are no such moneys received the general rule is that the machinery or plant is deemed to have been sold at its open market value on the date of the event which gives rise to the balancing allowance or charge. In certain other cases, where machinery or plant is sold or otherwise transferred and the purchaser or recipient uses it for trade purposes and both the seller or donor and the purchaser or recipient elect in writing and are connected with each other, the transfer may be treated for tax purposes as taking place at the lower of market value or tax written down value. However, this option is not available where the transfer is from a person who is not a company to a company, even if the parties are connected.

Details

Definition

(1) “open market price” is the price which the machinery or plant could have been sold in the open market at the time of the relevant event. In cases of dispute this price is to be determined by the Appeal Commissioners (see section 314(2)).

Permanent discontinuance of a trade

(2) If, at or about the time of the permanent discontinuance of a trade (including, by virtue of section 320(5), a deemed discontinuance) sale, insurance, salvage or compensation moneys are received, the actual amount of such moneys is to be taken into account in computing a balancing allowance or charge. In the absence of such a provision, such moneys arising after the permanent discontinuance of a trade could not be taken into account in computing the allowance or charge. In effect, the provision enables the actual sale, insurance, etc moneys received to be used where the machinery or plant is “disposed of” after the cessation of the trade.

In general, the provision does not apply to sales at less than market price as subsection (3) caters for such cases. However, the provision does apply to certain sales at less than market price (generally sales between associated persons) which under section 312 are deemed to have been made at market price.

Gifts and sales at less than open market price

(3) In certain cases balancing allowances and balancing charges are to be computed as if the machinery or plant had been sold at open market price. These cases are —

• where on the permanent discontinuance of the trade the machinery or plant is retained and subsection (2) does not apply (for example, where the trader does not sell the machinery or plant),
• where on the permanent discontinuance of the trade the machinery or plant is sold at less than open market price and the sale is not one to which section 312 applies, or the machinery or plant is given away,
• where the machinery or plant is sold at less than open market price and the sale is not one to which section 312 applies, or the machinery or plant is given away, or
• where during the carrying on of the trade the machinery or plant is transferred from business use to private use or where, on the transfer of a business from one partnership to another which is not treated as a permanent discontinuance of the trade, the machinery or plant is retained by the transferor.

(4) However, the open market price rule does not apply where machinery or plant is sold at less than market price or given away in circumstances where the purchaser or recipient is chargeable to income tax under Chapter 3 of Part 5 in respect of the “benefit in kind” received. In such a case only the net proceeds (if any) of the sale is taken into account in computing a balancing allowance or balancing charge.

Treatment of purchaser or recipient

(5) Where the machinery or plant is sold at less than open market price or given away to another person for use by that person for the purposes of a trade but is treated as having been sold at open market price, that person is, in general, to be treated, for the purposes of wear and tear allowances and future balancing allowances and balancing charges, as if he/she had purchased the machinery or plant at the open market price.

(6) However, an option exists whereby the old and new owner of the machinery or plant may jointly elect to have the transfer treated as if the machinery or plant had been sold at a price equal to the amount of the expenditure unallowed immediately before the gift or sale but only if the expenditure unallowed is lower than the open market price. Where such an election is made —

• no balancing allowance or charge is made to or on the old owner and the new owner’s title to wear and tear allowances and a balancing allowance (if any) in respect of the machinery or plant is based on an acquisition cost equal to the amount of the expenditure unallowed at the time of the gift or sale, and
• if on the occasion of a subsequent balancing event a balancing charge is to be made on the new owner, the amount of the charge to be made on the new owner will be equal to that which would have been made on the old owner if he/she had continued to own the machinery, had used it in the same way as it was in fact used by the new owner, and had been granted the allowances made to the new owner. In effect, the limit on the balancing charge is set at the aggregate of the capital allowances made to both the old and the new owners in respect of the machinery or plant.

(6A) This option is only available where the persons concerned are connected with each other (for example, transfers between relatives, partners or connected companies). Even where the parties are connected, the option is not available where the transfer is from a person who is not a company to a company.

Relevant Date: Finance Act 2021