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HMRC internal manual

Capital Allowances Manual

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HM Revenue & Customs
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ABA: balancing adjustments

Agricultural buildings allowance was phased out by FA2008. There is no ABA for the financial year beginning 1 April 2011 / tax year 2011/12 onwards.

CAA01/S380 and S383 - S387

A balancing adjustment is a balancing allowance or balancing charge.

There are no balancing adjustments if the balancing event is 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 which 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.

Once you have a balancing event this is how you calculate the balancing adjustment.

First, establish the residue of qualifying expenditure immediately before the balancing event. You do that by deducting all the ABA previously made whomever they were made to from the qualifying expenditure and adding any balancing charges to it. Include any balancing allowances and any initial allowances under CAA90/S124A which gave initial allowances on construction expenditure incurred under contracts entered into between 1 November 1992 and 31 October 1993.

Then compare the residue of expenditure with the proceeds of the balancing event.

The proceeds depend upon the balancing event. Here is a table showing the proceeds for the different balancing events.

The transfer of the relevant interest Net proceeds of the transfer to the person entitled to the relevant interest immediately before the transfer
   
The acquisition of the relevant interest by an incoming lessee who makes a payment to the outgoing lessee CA41000  The amount of the payment
The destruction of the building The net amount received for the remains plus any insurance payment received and any other capital compensation received in respect of the destruction
The building ceasing altogether to be used Any capital compensation received
 

If the residue is more than the proceeds the difference is a balancing allowance. If the residue is less than the proceeds the difference is a balancing charge. There is a limit on the amount of a balancing charge. A balancing charge made on a person may not exceed the allowances made to that person.

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.

Example Jack builds an agricultural building for £100,000, brings it into use as agricultural building, claims ABA each year and sells it to Terry for £45,000 after 10 years when the residue of expenditure is £60,000. Jack and Terry make an election to treat the sale as a balancing event so Jack gets a balancing allowance of £15,000. Terry gets allowances based on the residue after sale, £45,000 and his annual rate of ABA is £3,000 (= £45,000 / 15, the length of the writing down period remaining). Two years later when Terry has had ABA of £6,000 he sells the building for £50,000 in a sale that is a balancing event. The residue of expenditure when Terry sells the building is £39,000 (= £45,000, residue after sale, less £6,000, ABA made) and the difference between it and the sale proceeds is £11,000, but the balancing charge is restricted to the allowances made to Terry, £6,000.

Before the introduction of independent taxation a married woman’s ABA was made to her husband. Treat those allowances as made to her for the purposes of the balancing charge limit.

There is nothing to stop people making an election to treat a post-commencement balancing event as a balancing event for ABA purposes but if they do it has little or no effect because there is no balancing adjustment and the residue of qualifying expenditure immediately after it is the same as the residue of qualifying expenditure before it.

Example 

Maggie owns a farm. There is a barn on it that she built 15 years ago for £100,000. She no longer needs the barn so on 1 May 2007 she sells it to Vincent for £70,000 to use as a studio. They make a balancing event election. The residue of qualifying expenditure before sale is £40,000. Normally Maggie would have had a balancing charge of £30,000 and Vincent’s ABAs would have been based on a residue of qualifying expenditure after sale of £70,000. There is not a balancing charge because the sale took place after 21 March 2007. Vincent’s ABAs are based on a residue of qualifying expenditure after sale pf £40,000.