Do I Have To Pay Taxes On Barter Services

Castling transactions are more than mutual than many assume – Marc Selby sets out the central VAT problems for practitioners to take into business relationship

Property transactions often involve the giving or receipt of consideration other than, or in addition to, coin. These are castling transactions and information technology is important for those advising the parties to identify whatsoever non greenbacks consideration, to analyse the VAT implications and to ensure that there are no unexpected VAT costs by appropriately documenting the transactions.

The following are examples of barter in the context of holding transactions (simply the listing is by no means exhaustive):

An exchange of holding interests, such as a surrender of an old lease in commutation for the grant of a new lease or a sale and leaseback transaction.
The purchase of a property where the consideration comprises or includes the buyer, or an associate of the buyer, agreeing to deport out works on country retained by the seller.
The supply by a tenant inbound into a new lease of services in consideration for the tenant existence granted a hire gratis period.

In the first instance it is necessary to establish whether a political party who is acquiring land or an interest in state, and who is doing something in improver to making a cash payment, is making a supply for consideration. For instance:

Works which a buyer carries out on country retained by the seller solely for the buyer's benefit, eg the installation of service media on land retained by the seller for the benefit of the heir-apparent's land, would not be consideration for a supply by the buyer;
Generally, the grant of a rent-free period does not count equally consideration for a supply past the tenant, eg a rent costless period during which the tenant will be plumbing fixtures out the bounds to its specifications. Notwithstanding, a rent gratis menstruum tin constitute consideration where the tenant is providing a do good to the landlord (in addition to accepting the grant of the charter), such as conveying out improvements to the building, see HMRC's VAT, Supply and Consideration Manual, para VATSC4800.

Having established that the buyer or tenant is providing non cash consideration, it will be necessary to ascertain the VAT status of each party's supply. For example:

Each political party could exist making a VAT exempt supply, eg the surrender of an existing lease of a building containing only dwellings in exchange for a new (longer) lease of the building (whether or not at that place is also cash consideration).
Each political party might make a taxable supply, eg the sale of the freehold of a newly constructed commercial building and the leaseback of office of the building from a buyer who opts to tax the building before granting the charter dorsum.
Each political party might make a supply of a different status, eg the seller could sell a commercial investment holding subject to leases with that transaction existence a transfer of a going concern (and thus outside the scope of VAT), with the buyer opting to tax the property and granting a lease of a commercial part of the building dorsum to the seller (and thus making a taxable supply).

When advising a political party to a barter transaction, the following should be noted:

Non-cash consideration which is received for a taxable supply must be valued. For VAT purposes the value of the supply is such corporeality every bit, with the add-on of the VAT chargeable, is equal to the consideration, VATA 1994, Section nineteen. So, the VAT liability of the person who provides non cash consideration volition be adamant by reference to the value which, together with the VAT chargeable, that person receives every bit consideration for the supply.
The value of the consideration received for the supply is determined subjectively past reference to the value assigned to the supply by the recipient of the supply meet Naturally Yours Cosmetics Limited v C&E (No2) [1988] STC 879. Generally, this will be the value of the payment which the recipient of the supply would have expected to make if the consideration for the goods or services which he or she receives had been in money.
A political party who receives cash consideration in a barter transaction should ensure that the value on which that person accounts for VAT includes the non cash, as well as the cash, consideration.
In principle, where unconnected parties are dealing on an arm'due south length commercial basis, information technology is likely that the full value of the supplies by each party volition be of equal value.
Ideally, the value of each party's supply should be expressly agreed and confirmed in the contract, although such an agreement will non demark HMRC. HMRC may exist more likely to scrutinise the value of the supply in cases where each political party is making a supply of a different status to the other, eg where one political party is receiving an exempt supply in commutation for a standard rated supply by the other political party.
Where a party is making a supply which is taxable at the standard (or reduced) rate, it is important to ensure the value attributed to the supply in the contract is sectional of VAT and that the contract requires payment of such VAT past the recipient of the supply, otherwise the value of the supply will be VAT inclusive (and the person making the supply will finer bear the VAT charge).
The contract should also provide for the issue of VAT invoices past each party who is making a taxable supply and for payment by the recipient of the supply of the VAT which arises from the supply.
If and to the extent that each political party is making a taxable supply for not cash consideration and the value of such supplies by each party is equal, the VAT accounting can be dealt with by the event of VAT only invoices, with the VAT payable by each political party being gear up off, thereby avoiding the need for each political party to brand a cash payment of the VAT due in respect of the not greenbacks consideration received.
Each party making a taxable supply will need to establish the tax indicate for the supply, since this will determine when VAT must exist accounted for to HMRC. Generally, a taxation point volition arise on receipt of payment, including not cash consideration, for example in a sale and leaseback transaction (bold each party is making a standard rated supply) the tax bespeak for each party'due south supply volition normally occur on completion of the transaction. Still, a tax point can arise at an before phase, eg on the result of a VAT invoice prior to the completion appointment.

A suggested precedent for a VAT clause in a sale and leaseback transaction where each party is making standard rated supplies is ready out in an Appendix to this article. This precedent will, of course, need to exist adjusted according to the circumstances of each transaction, in particular where one party is making a supply which is of a dissimilar VAT status to the other.

Barter tin can arise even in apparently straightforward property transactions, such as a sale and leaseback. Information technology is important that the VAT implications of such transactions are properly addressed and documented. It is hoped that the commentary prepare out in this article, and the precedent which follows, will help the reader.

Appendix

Suggested precedent for a VAT clause for a sale and leaseback transaction where both the Seller and the Buyer are making standard rated supplies, with the Buyer agreeing to acquit out works to premises leased back.

Ten.1 The Seller and the Heir-apparent warrant and confirm to each other that:

X.ane.ane they have opted to revenue enhancement the Belongings for VAT with effect from a date on or before the Completion Date and that their respective options to tax have been duly notified to HMRC; and
X.1.ii they are duly registered for VAT.

X.2 The Seller and the Heir-apparent consider that:

Ten.2.1   the sale or transfer of the Holding by the Seller to the Buyer pursuant to this Agreement will exist a supply past the Seller to the Buyer;
X.ii.2   the carrying out by the Buyer of the Works and the grant of the Lease to the Seller pursuant to this Understanding will be supplies by the Buyer to the Seller;
X.2.3   the supply past the Seller to the Heir-apparent will, to the extent of the Purchase Price (which is exclusive of VAT chargeable), be for consideration in cash and will, to the extent that its value exceeds the Purchase Price, be for non monetary consideration; and
X.2.4   for VAT purposes the value of the supply by the Seller, to the extent that it exceeds the Purchase Toll, and the value of the supplies by the Buyer volition be [£ ] (exclusive of VAT payable).

10.3 Upon completion:

10.iii.one   the Seller shall issue to the Buyer a VAT invoice in respect of the Buy Price payable and the Buyer shall pay the VAT chargeable (together with the Purchase Toll) upon completion; and
Ten.3.ii   each of the Seller and the Buyer will issue to the other a VAT only invoice with the corporeality of the VAT payable calculated by reference to the value of the supply made by the Seller (to the extent that it exceeds the Purchase Toll) and the value of the supply made past the Buyer (as the instance may be) referred to in clause Ten.two.four to a higher place; and
X.3.3   the amount of VAT payable by the Buyer in the VAT invoice issued past the Seller under clause X.3.2 to a higher place being equal to the amount of VAT payable by the Seller in the VAT invoice issued by the Heir-apparent under clause Ten.3.2 higher up, each party agrees to the set off of such VAT due from the other such that no cash payment will be required to be made between the parties in respect of such VAT.