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Hi all I’m a bit confused about the answer.
I went through the question and didn’t have to many problems till it came to the balancing charge.
The main pool ends up with (15,300) which then produces a charge of 15,300 which I understand however then when it’s transported into the ttp proforma instead of it being a negative as the notes suggest it’s a +I’ve and added to the trading profit so it becomes
Trading profit 52400
Balancing charge 15300
Revised profit 67700My question is why is it but in as a +ve when the charge should be -ive and reduce the trading profit
If the pool has been reduced to a balance of -15300 then the company has claimed £15300 more capital allowances than it should have and therefore has paid less tax than it should have. This can happen when items in the pool are sold for more than their tax written down value.
The purpose of the balancing charge is to counteract this so that the company has only claimed the capital allowances it is entitled to. Its called a charge because it increases the level of tax paid. However the way it does this is to increase taxable profits which increases tax payable.
If the charge worked like an accounting expense and reduced profit then it would actually reduce the amount of tax paid which clearly isn’t its purpose.
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