ACCA Advanced Taxation (ATX) Practice Exam

What is the treatment for disposals of plant and machinery on which Enhanced Capital Allowances (ECAs) were claimed?

1. Tax deductions based on market value

2. Capital losses offset against future gains

3. Balancing charge based on the proportion of expenditure

4. Immediate tax relief with no restrictions

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

When disposing of plant and machinery on which Enhanced Capital Allowances (ECAs) have been claimed, the treatment involves calculating a balancing charge. This balancing charge is determined based on the proportion of the expenditure originally incurred. ECAs allow businesses to claim higher initial tax relief on investments in energy-efficient equipment, but when such assets are disposed of, the tax implications must be addressed. The balancing charge arises to recapture the tax benefit that was previously obtained through the ECA. Specifically, if the asset is sold for an amount greater than its tax written down value, the difference is treated as a balancing charge. This effectively brings into account the enhanced relief that was claimed and adjusts the company’s tax position accordingly. In contrast, the other options do not align with the specific treatment for disposals of ECAs. Immediate tax relief with no restrictions would not apply after a disposal, as there are conditions and potential recapture through balancing charges. Tax deductions based on market value inaccurately suggest a different calculation method that does not correspond with the accounting treatment required for disposals. Lastly, capital losses are an entirely different consideration and relate more to assets sold for less than their cost basis, which again, does not apply specifically to ECAs in the context of disposing plant