ACCA Advanced Taxation (ATX) Practice Exam

What is the consequence if equipment is claimed under a 50% First Year Allowance (FYA)?

1. Balancing charge equals market value

2. Balancing charge calculated based on proportion of expenditure

3. No balancing charge applied

4. It allows for immediate full deduction

The correct answer is: Balancing charge calculated based on proportion of expenditure

When equipment is claimed under a 50% First Year Allowance (FYA), it means that the taxpayer can deduct 50% of the cost of the asset from their taxable profits in the year of purchase. The remaining 50% of the cost is added to the pool of qualifying expenditure for future capital allowances claims. In the event that the equipment is sold or disposed of before the end of its economic life, a balancing charge may apply. This balancing charge is calculated based on the proportion of the expenditure that was not initially claimed as a capital allowance. Since only half of the equipment's cost was claimed in the year of purchase, the balancing charge would relate to the unsclaimed portion, which comprises 50% of the original expenditure. Thus, the calculation for any balancing charge is based on this proportion, reflecting the fact that only half of the asset's cost has been deducted initially. This is why the correct answer emphasizes the balancing charge being calculated based on the proportion of expenditure. Understanding this is crucial for tax planning, as it impacts future tax liabilities if the asset is disposed of prematurely.