When a business sells a piece of plant or machinery, the immediate focus is usually on the capital allowances consequences. Was the asset in the main pool or a single asset pool? Will there be a balancing allowance or a balancing charge?

However, there is another aspect of the disposal that is frequently overlooked: the potential interaction with the chargeable gains rules.

In certain circumstances, the disposal of business plant and machinery can result in both a balancing charge and a chargeable gain. Equally, an economic loss on disposal does not necessarily mean that an allowable capital loss will arise.

Understanding how these two tax regimes work together is essential to ensuring that disposals are treated correctly for corporation tax purposes.

What Is a Chattel?

A chattel is defined as tangible movable property – in other words, a physical asset that you can touch and move.

Examples include:

• Machinery and equipment
• Commercial vehicles
• Fine art and antiques
• Jewellery
• Fine wine
• Racehorses and other collectibles

The capital gains legislation distinguishes between wasting chattels and non-wasting chattels.

Wasting Chattels

A wasting chattel is an asset with an expected useful life of 50 years or less. The useful life is determined at the date of acquisition, having regard to the purpose for which the asset was acquired.

Generally, gains on wasting chattels are exempt from capital gains tax and losses are not allowable.

For example, if an individual purchases a racehorse or a collection of fine wine and later sells it at a profit, the gain will usually be exempt because the asset is a wasting chattel.

HMRC regards plant and machinery as always having a predictable life of less than 50 years. As a result, plant and machinery is normally treated as a wasting asset.

The Important Exception for Business Assets

The position changes where the wasting asset:

• is used in a trade, profession or vocation; and
• capital allowances have been claimed or could have been claimed.

In these circumstances, the normal exemption for wasting assets does not apply.

This can lead to two separate tax consequences on the disposal of the same asset:

1. A balancing charge or balancing allowance under the capital allowances regime; and
2. A chargeable gain under the chargeable gains regime.

This is an area that can easily be overlooked, particularly where an asset has increased in value.

Example 1 — Balancing Charge and Chargeable Gain
A company purchases a commercial van for £31,000 and claims 100% relief under the Annual Investment Allowance.

The tax written down value is therefore reduced to nil.

Several years later, the van is sold for £34,500.

Capital allowances position

• Cost: £31,000
• Tax written down value: £nil
• Disposal proceeds: £34,500

The disposal proceeds would ordinarily create a balancing charge of £34,500. However, a balancing charge cannot exceed the capital allowances previously given. The balancing charge is therefore restricted to £31,000.

Capital gains position
The company has sold the asset for more than its original cost.

• Disposal proceeds: £34,500
• Original cost: £31,000

The excess of £3,500 represents a chargeable gain.

The company is therefore taxed on:

• £31,000 as a balancing charge; and
• £3,500 as a chargeable gain.

Although the entire economic profit is brought into charge, it is taxed through two separate regimes.

Example 2 — Why an Economic Loss Does Not Necessarily Produce a Capital Loss
A company purchases machinery for £100,000 and claims 100% relief under the Annual Investment Allowance.

Several years later, the machinery is sold for £20,000.

Capital allowances position

• Cost: £100,000
• Tax written down value: £nil
• Disposal proceeds: £20,000

As there is no balance remaining in the pool, the disposal gives rise to a balancing charge of £20,000.

The company therefore repays £20,000 of the capital allowances previously claimed and retains net tax relief of £80,000.

Capital gains position
Economically, the company has suffered a loss of £80,000:

• Cost: £100,000
• Proceeds: £20,000
• Economic loss: £80,000

At first glance, it might appear that this should create an allowable capital loss.

However, allowing a capital loss would effectively provide relief twice for the same expenditure.

The company has already retained tax relief of £80,000 through the capital allowances regime. Accordingly, no allowable capital loss arises.

This is an important principle that is often misunderstood. An economic loss on the disposal of plant and machinery does not automatically translate into an allowable capital loss for tax purposes.

What About Non-Wasting Chattels?

The rules for non-wasting chattels are different again.

Examples of non-wasting chattels include:

• Fine art
• Antiques
• Jewellery
• Certain collectibles

Special rules apply, including:

• gains are exempt where disposal proceeds do not exceed £6,000;
• losses may be restricted where proceeds are below £6,000; and
• where proceeds exceed £6,000 and the asset originally cost less than £6,000, the special “5/3 rule” may cap the taxable gain.

These rules are commonly encountered in private wealth and estate planning and can produce unexpected outcomes.

Key Takeaways for Businesses

Whenever a business disposes of plant and machinery, it is important to consider more than just the capital allowances position.

The following questions should always be asked:

• Is there a balancing charge or balancing allowance?
• Do the disposal proceeds exceed the original cost, potentially creating a chargeable gain?
• Has the business already obtained tax relief through capital allowances, preventing a capital loss from arising?

With the increased use of the Annual Investment Allowance and full expensing, many businesses now hold assets with a tax written down value of nil. In periods of inflation or where second-hand values are unusually strong, it is entirely possible for assets to be sold for more than their original cost.

Equally, businesses should not assume that an economic loss on disposal automatically gives rise to an allowable capital loss.

The interaction between capital allowances and chargeable gains is a technical area of tax legislation and can easily be overlooked when preparing tax computations.

Need Advice?

If your business is disposing of plant and machinery, or if you are unsure how a disposal should be reflected in your corporation tax computation, professional advice can help avoid costly mistakes.

We regularly advise businesses on capital allowances, chargeable gains and the tax consequences of asset disposals. If you would like to discuss a disposal or require support with your tax affairs, please get in touch with our team. We would be delighted to assist.