ACCA Taxation (F6) Practice Exam

Which of the following best describes a balancing charge?

1. Adjustment to previous claims

2. Loss on sale of assets

3. Profit resulting from the sale of an asset, leading to a negative capital allowance

4. Payment to write off losses

The correct answer is: Profit resulting from the sale of an asset, leading to a negative capital allowance

A balancing charge refers to a situation where the proceeds from the sale of an asset exceed its tax written down value, resulting in a charge to the taxable income. This occurs when an asset, which has been previously eligible for capital allowances, is sold at a profit. The amount that reflects this profit serves to reduce the overall capital allowances claimed in prior periods, aligning the tax treatment of the asset with its economic reality. In essence, when the asset is sold for more than its value on the balance sheet for tax purposes, it creates a scenario where a balancing charge is applied, leading to a negative adjustment in the capital allowances. This ultimately means that the profit from the sale is taxed, thereby re-establishing balance in the tax relief that was previously claimed. The other options do not fully capture the essence of what a balancing charge entails. Adjustments to previous claims generally refer to other types of tax adjustments, rather than specifically addressing the impact of asset sales. A loss on sale of assets would result in a different tax implication altogether, typically not leading to a balancing charge. Payments to write off losses pertain to different financial contexts, primarily related to writing off bad debts rather than the mechanics of capital allowances.