IBA: balancing adjustments: balancing charge or balancing allowance
Budget 2007 announced a business tax reform package including the gradual withdrawal of IBAs and ABAs over four years. Legislation was introduced in FA08 to give effect to those changes. The phased withdrawal of IBA writing down allowances had effect for chargeable periods ending on or after 1 April 2008 for businesses within the charge to CT and 6 April 2008 for businesses within the charge to IT. There are no IBA writing down allowances for the financial year beginning on 1 April 2011 and subsequent years.
CAA01/S314 - S315, FA07/S35, FA08 Sch.27 Para 31
A balancing adjustment is a balancing charge or a balancing allowance. A balancing charge made on a person must not be more than the allowances made to that person.
Broadly, FA07 abolished balancing adjustments apart from enterprise zone expenditure with a saving for pre-21 March 2007 contracts.
Here are details of the legislation.
There are no balancing adjustments for balancing events on or after 21 March 2007 unless
- the qualifying expenditure is qualifying enterprise expenditure, or
- the balancing event is not a post-commencement balancing event.
A post-commencement balancing event is a balancing event that occurs on or after 21 March 2007 apart from an event that occurs before 1 April 2011 in pursuance of a relevant pre- commencement contract.
These are the conditions that have to be satisfied for a contract to be a relevant pre- commencement contract.
- The contract is a contract made in writing before 21 March 2007,
- the contract is unconditional or its conditions were satisfied before 21 March 2007,
- no terms remain to be agreed on or after 21 March 2007, and
- the contract is not varied in a significant way on or after 21 March 2007.
Example Warren holds the relevant interest in a factory in Soho in London that he occupies and uses for his trade of manufacturing werewolf costumes and other outfits. In early 2007 there is a slump in the market for werewolf costumes so Warren decides to retire and sell up. Gordon has been looking for a factory for his designer dress business, so he immediately offers to buy the factory and he and Warren finalise a binding contract for the sale of the factory on 1 March 2007, with completion and entry on 1 May 2007. Because the binding contract was effected prior to 21 March 2007 it constitutes a ‘relevant pre-commencement contract’ and so the sale on 1 May 2007 gives rise to a balancing event. The factory has, in fact, retained its value well and Gordon has paid £500,000 for it, compared with its capital allowances written-down value of £200,000 in Warren’s hands. So Warren is liable to a balancing charge of the sale proceeds (£500,000) less the residue of qualifying expenditure (£200,000) immediately before the event. Thus the balancing charge to be added to Warren’s cessation profits is £300,000. Gordon is entitled to a recalculated WDA based on his purchase price over the remainder of the 25 year period since the factory was first used (S.311/CAA01), which is subsequently progressively reduced by 25% a year during the IBA phasing out period from 2008 to 2011, when IBAs will cease to be available. Had Warren delayed completing the contract for the sale until after 21 March 2007, the sale would not have given rise to a balancing event or balancing adjustment, and Gordon would have been eligible for the amount of IBAs Warren had been entitled to, gradually reducing between 2008-2011 in terms of the IBA phasing-out provisions.
Buildings in enterprise zones
The abolition of balancing charges from 21 March 2007 does not apply to buildings in enterprise zones that have qualified for initial allowance or writing down allowances at the 25% rate. If there is a balancing event in relation to a building in an enterprise zone that has qualified for initial allowance or writing down allowance and that event would give rise to a balancing charge there is a balancing charge unless the event occurs more than 7 years after the building was first used.
Example Bob builds a building in an enterprise zone for £1.5 million and claims EZAs of £1.5 million. He leaves it standing empty for a few years but brings it into use on 1 March 2006. He sells the building for £1.7 million on 14 July 2012. There is a balancing charge of £1.5 million. If he had deferred selling the building until 1 March 2013 there would not have been a balancing charge because 1 March 2013 is more than 7 years after 1 March 2006, the date that the building was first used,
A balancing adjustment is made when IBA has been made on a building and there is then a balancing event. The balancing adjustment makes the allowances made equal the actual depreciation of the building while the person held the relevant interest in it. For example, if the building has increased in value the balancing adjustment recovers all the IBA that has been made.
The legislation in CAA01/S570A applies to prevent the making of a balancing allowance when the proceeds of the balancing event are affected by a tax avoidance scheme CA17000.
A balancing adjustment is made for the chargeable period in which the balancing event occurs. It cannot be made more than 25 years (50 years where the qualifying expenditure was incurred before 6 November 1962) after the building was first used.
A balancing event is:
- the transfer of the relevant interest;
- the coming to an end of a leasehold interest unless the person entitled to it acquires the interest which is reversionary on it;
- the demolition or destruction of the building;
- the building ceasing altogether to be used without being demolished or destroyed;
- where the relevant interest depends on a foreign concession, the coming to an end of that foreign concession.
A foreign concession is a right or privilege granted by the government of, or any municipality or other authority in, a territory outside the UK.
You should remember that the transfer of the relevant interest includes the surrender of a lease for valuable consideration.
You may have a case where the owner of an industrial building dies. If the building is specifically bequeathed do not treat the temporary vesting of the property in the hands of the personal representatives as a balancing event. There is, however, a balancing event when the property is eventually transferred to the beneficiary. Treat the transfer to the beneficiary as taking place at market value unless there is an election to treat the sale as being for an alternative amount CA13200.
Apart from that exceptional case treat the vesting of the property in the hands of the personal representatives as a balancing event. Again, you should treat the transfer to the personal representatives as taking place at market value unless there is an election to treat the sale as being for an alternative amount CA13200.
You should only accept that a building has ceased altogether to be used if it can no longer be used for anything. Cessation of use as an industrial building is not enough. Examples of the sort of case where you can accept that a building has ceased altogether to be used are:
- the building becoming derelict
- the building being condemned
- the building being due for demolition because it is in the path of a motorway.
A balancing adjustment may be made after a building has ceased to be an industrial building. If there is more than one balancing event of the type listed above after a building has ceased to be an industrial building a balancing adjustment is only made on the first one. This rule does not apply to other types of balancing event like the making of an additional VAT rebate CA39300. After a building has ceased to be an industrial building, the owner may receive an additional VAT rebate and then sell the building 2 years later. Both the receipt of the additional VAT rebate and the sale of the building are balancing events.
There is an additional balancing event for qualifying hotels. If there is a period of 2 years during which the building is not a qualifying hotel and there is no balancing event during that 2-year period, the hotel is treated as sold for its open market value at the end of the 2-year period. This means that there is a balancing adjustment at that point.
If a qualifying hotel becomes temporarily disused it is treated as a qualifying hotel for 2 years after the end of the chargeable period in which the temporary disuse begins. It is then no longer treated as a qualifying hotel and so there is a balancing adjustment if another 2 years go by without it becoming one again.