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CTA09/PART 8/S849C {#} (3)

Calculation of accounting or fixed rate debits

As explained at CIRD44450, the FA15 rules are only intended to restrict when relief is given for internally-generated assets acquired from a related party. The objective is to defer debit relief for related party acquisitions until a time when the asset is realised, not disallow the costs completely. When there is a realisation of a relevant asset that includes previous third party acquisition costs, CTA09/S849C therefore requires that two debits are brought into account; a trading debit and a non-trading debit.

The calculation of the two debits arising on realisation cannot be a straightforward apportionment between the trading debit and non-trading debit because the calculation has to take account of the debits previously disallowed. The realisation computation needs to relieve those debits that have been subject to a restriction. This is achieved in two steps as explained below:

CTA09/PART 8/S849C (4)

Step 1 鈥� calculate the trading debit on realisation

The calculation of the trading debit starts by considering the amount of the debit (D) that would have been relieved under CTA09/PART 8 if the restriction in CTA09/S849C did not apply. As is explained in CIRD44500, this means that all the other rules within CTA09/PART 8 must be applied before calculating D.

Once the debit (D) has been calculated the CTA09/S849C restriction is applied to it. This is achieved by applying the appropriate multiplier (AM). AM is determined by the formula:

AM = RAVTPA/CEA

NB: AM may have been already calculated in a previous accounting period. If not calculated already (because the asset is realised in the same period it was acquired) see CIRD44300 for further details of how to calculate AM.

Example

The company disposes of a relevant asset. The cost of the asset was 拢280,000 including third party acquisition costs of 拢70,000. AM is therefore 0.25.

The relevant asset was to have been written off over 5 years but at the end of year 3 it is sold for 拢80,000. On disposal the accounting value is 拢140,000 (year 1 amortisation for 6 months was 拢28,000 with further amortisation in years 2 and 3 of 拢56,000pa).

The tax debits under CTA09/PART 8/Chapter 3 have been restricted for years 1-3 by the AM (0.25) to 拢7,000, 拢14,000 and 拢14,000 respectively. The actual Tax Written-Down Value (TWDV) at the end of year 3 is 拢245,000 but the notional TWDV, absent any restrictions, is 拢140,000.

The unrestricted debit on disposal (D) is therefore 拢60,000 (notional TWDV 拢140,000 less sale proceeds 拢80,000). This is restricted by CTA09/S849C by the AM (0.25) to give the allowable trading debit.

拢60,000 (D) x 0.25 (AM) = 拢15,000

CTA09/PART 8/S849C (5)

Step 2 - calculate non-trading debit on realisation

The non-trading debit includes the balance of the accounting loss that arises on realisation but also needs to include the amortisation debits disallowed in previous accounting periods. The allowable non-trading debit on realisation should therefore be the actual tax loss on realisation less the amount relieved as a trading debit.

This is expressed using the formula:

D 鈥� TD = NTD

Example

Continuing the example from above, the total tax loss (D) on realisation is:

拢245,000 (actual TWDV) 鈥� sale proceeds 拢80,000 = 拢165,000

The trading debit (TD) to be allowed on realisation as calculated at step 1 is 拢15,000. So using the formula D 鈥� TD =NTD the non-trading debit is:

拢165,000 (D) - 拢15,000 (TD) = 拢150,000 (NTD)

Example 1 at CIRD44650 summarises the relief due over the life of the asset for the example above. Example 2 includes a similar example where tax cost has been adjusted.