If the asset originally cost £100k in 2012 was depreciated in the accounts by £95k, the accounts would show a ‘book value’ of £5k as the company expected it to be obsolete pretty quickly. Happily they happened to find a buyer in eastern Europe willing to pay £90k for this particular model. Therefore, proceeds of £90k – ‘book value’ of £5k = a profit of £85k in the company’s accounts.
For corporation tax purposes, in this year the 100% tax allowance was low and had been used on other assets. This asset could only claim tax allowances of 18% reducing balance, the ‘normal’ rate at the time. The ‘tax value’ is therefore £54k (£100k – £18k – £15k – £13k).
When the asset is sold, the £90k proceeds are offset against the £54k so that overall the company only claims allowances on its net spend of £10k (£100k – £90k). Some of its earlier capital allowances are reversed and £36k (£90k – £54k) is charged on the company. Happily the company can offset this by claiming 100% allowances on the replacement asset costing £60k.
Overall, the company has made a large profit but its tax bill is £Nil:
- Profits in the accounts are £100k, but taxable profits have become tax losses of £9k
- (£100k profits – £85k asset book profit + £36k reversal of tax allowances – £60k new tax allowances).
By looking at the accounts you’d expect its tax bill to be:
- 20% of £100k = £20k tax due.
After these adjustments there is a tax refund of:
- 20% of a £9k loss = £2k refund from the year before.
These are a very particular set of circumstances to illustrate that the profit in your accounts isn’t always a good indication of the tax that’s due.
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