Barter transactions between businesses can be beneficial to both parties, but they can cause tax problems.
The starting point is that each party is treated as making a sale to the other. The first problem is the value to be ascribed to that transaction. HMRC’s published guidance for traders is that: ‘Even if you do not record these [sales] through a till, you will need to make a record, at the time the transaction takes place, of the goods supplied and their retail selling price.’ What HMRC have in mind here is the butcher who agrees with the hairdresser to give her a joint of meat in exchange for a haircut. The butcher is to be treated as selling the meat for the price he would usually charge in his shop. Similarly, the hairdresser is treated as making her usual charge for a haircut.
However, retail price applies only if the goods or services would usually have been sold in the course of a retail business. Elsewhere, HMRC has said that: ‘All receipts arising from contra, barter or reciprocal arrangements must be valued at the fair value of the goods and services exchanged.’ The rule of thumb is that the goods and services supplied must be valued at the price which would be charged if they were sold in the usual course of the trader’s business.
That said, in the case of an arm’s length transaction, HMRC accept that they cannot ‘second guess’ a cash value put on the transaction by the parties at the time it took place – for example, if each gave the other an invoice for an agreed amount. Unless, that is, the parties used figures which are clearly unrealistic.
The second problem, surprisingly, can be in realising that a barter transaction has taken place at all. For example, Adam rents a storage shed and yard from Brian. Part of the deal is that Brian is allowed to park his van in the yard. Depending on the exact wording of the documentation, it may be that Adam is treated as providing a parking facility as part of the rent he pays for the shed and yard. That would not affect his taxable profit, but it would mean that Adam should have accounted for VAT on the notional charge for parking.
The VAT implications of ignoring or wrongly pricing barter transactions can in fact be much more significant than the income or corporation tax consequences. If the goods and services supplied are business purchases for both parties, then the notional sale of the items supplied will usually be balanced out by the notional purchase of the items received and the profit will remain the same. However, there may still be VAT problems – for example, if the items supplied were standard-rated but the items received in exchange were zero-rated. The worst case scenario, perhaps, is that the trader has not registered for VAT because he thought his turnover was below the threshold, but adding on barter sales brings him above the threshold, perhaps for several past years.
There are indications that HMRC is beginning to focus on barter transactions, perhaps because it associates them with the ‘informal economy’. There is of course nothing wrong with bartering goods or services in the course of a business, but we would urge clients to keep good records of their barter transactions, so that they can demonstrate to HMRC that they have been correctly dealt with for tax purposes. Moreover, if you are regularly undertaking barter transactions, we would suggest that you discuss them with us now, to ensure that they are being properly recorded – a stitch in time may save nine times the trouble with the taxman later!