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Balancing Charge

A balancing charge is a charge that HMRC uses to prevent you from claiming too much tax relief for a piece of equipment you’ve bought. Now, we know what you’re thinking. How can you claim too much tax relief? Essentially, the charge affects larger items that you buy for your business and it can be activated after you’ve sold the item. 

Help! I’m confused

Think of the balancing charge as the opposite to a capital allowance. You use capital allowances to claim tax relief against things you buy for your business e.g. electrical equipment, machinery, tools etc. You use them to reduce the tax you pay. But the balancing charge does the opposite. It increases the tax you pay. (Sob).

If you’re self-employed and you buy a laptop, for instance, you can claim capital allowances like the Annual Investment Allowance (AIA) to offset the cost of it. But if you later sell the laptop, you might need to add a balancing charge. This is so your profits are calculated accurately, and you pay the right tax. 

The charge is therefore the tax relief (capital allowance) you claimed for the laptop minus the resale price. 

The balancing charge in practice

If you want a closer look at how this looks in numbers, here’s a quick example:

  • You’re self-employed and you buy a laptop for work
  • You pay £2,000 for it and claim the AIA for the full amount
  • The tax written down value of the laptop, which is the original price minus the AIA, is £0
  • 4 years later, you sell the laptop on eBay for £500
  • As this is more than the tax written down value, you must add a balancing charge to your annual profit when you do your tax return
  • Laptop sale price (£500) + capital allowances claimed (£2,000) minus the original laptop price (£2,000) = £500
  • This is the balancing charge 
  • You add this to your profits on your tax return

 

 

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