How to sell a capital asset when using cash basis accounting

This article explains how to record the disposal of a capital asset that your business sells if you’re preparing your accounts using cash basis accounting.

When using cash basis accounting, most asset purchases should be deducted as a business cost rather than as a capital allowance. However, land, buildings, cars and motorcycles cannot be treated as costs when using cash basis accounting. Capital allowances can usually be claimed on cars and motorcycles.

Therefore, the way you record the disposal in FreeAgent depends on whether you previously recorded the asset purchase as a business cost or claimed capital allowances. If you’re unsure how to record the disposal, please ask your accountant.

If you’re preparing your accounts using traditional accruals basis accounting, find out how to sell or scrap a capital asset.

Disposing of an asset that was recorded as a business cost

To record the sale of a capital asset that was recorded as a day-to-day running cost of the business when it was purchased, you’ll need to explain the bank transaction using the appropriate ‘Type’ and ‘Category’ as detailed below.

Select ‘Refund’ from the ‘Type’ drop-down menu and select the same cost category that you allocated the purchase to from the ‘Category’ drop-down menu. If you’re not sure which category to select, please ask your accountant.

Select ‘Explain transaction’ to complete the process.

Disposing of an asset that was recorded as a capital asset purchase

To record the sale of a capital asset that was recorded as a capital asset purchase rather than a cost, you’ll need to explain the bank transaction using the appropriate ‘Type’ and ‘Category’ as detailed below.

Select ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu and select the asset that you’re disposing of from the ‘Disposed asset’ field.

Select ‘Explain transaction’ to complete the process.

The disposal will be recorded in your Capital Assets report.

The figure that’s displayed next to the disposal line item is the asset’s net book value, which is the remaining value that the asset had on the date you disposed of it. FreeAgent calculates this by subtracting the amount by which the asset had depreciated up to the date you disposed of it from the asset’s original value.

Balancing charge

If you sell a capital asset that you’d used to reduce your tax bill through capital allowances, you may need to increase the amount of profit you have to pay tax on by way of a balancing charge. To reflect this, you may need to manually override the amount in box 26 of your Self Assessment tax return if you’re using the short version of the Self-employment page, or box 59 if you’re using the long version.

To calculate the balancing charge, you’d normally add the amount you sold the item for to the capital allowances you claimed, then subtract the amount you originally bought the item for. If you’re unsure whether you need to enter a balancing charge or how to calculate it, please ask your accountant.

Additional steps for VAT-registered businesses

If your business is registered for VAT and you’re selling a capital asset that was recorded as a capital asset purchase, you’ll also need to raise a VAT invoice for the disposal in addition to following the process outlined above.

If you’re on the VAT Flat Rate Scheme and you reclaimed VAT on the purchase of the asset, the disposal of the asset will need to be handled outside of the Flat Rate Scheme and standard VAT will be paid on the sale. FreeAgent will handle this automatically for you.

Capital gains tax

If you sell a capital asset for a profit, you may need to pay Capital Gains Tax on it. Sole traders will need to include this information on the Capital Gains and Tax Adjustments pages of their Self Assessment tax return. Please note that the Capital Gains pages and the relevant box for this on the Tax Adjustments page are not currently supported by FreeAgent.