ACCA Taxation (F6) Practice Exam

What capital allowances can be claimed when disposing of assets in the year of cessation?

1. No capital allowances can be claimed

2. Balancing allowance only

3. Balancing charge only

4. Balancing allowance or charge on the disposal

The correct answer is: Balancing allowance or charge on the disposal

When an individual or business ceases trading and disposes of its capital assets, it can claim either a balancing allowance or a balancing charge on those assets during the year of cessation. A balancing charge arises when the disposal proceeds of the asset exceed its tax written down value (the value considered for tax purposes after deducting capital allowances previously claimed). This means that the taxpayer will need to add back a portion of the allowances previously claimed, as the asset has appreciated in value for tax purposes. Conversely, a balancing allowance occurs when the tax written down value of the asset exceeds the disposal proceeds. In this case, the taxpayer can claim an allowance that reflects the loss in value that has not been previously captured through capital allowances. This flexibility in claiming either a balancing allowance or charge in the year of cessation reflects the need to adequately account for the final taxation position of the business’s capital assets, ensuring that any gains or losses on the assets are taxed appropriately. Thus, the option indicating that either a balancing allowance or charge can be claimed during asset disposal in the year of cessation is the correct answer.