How Does Contra Dealing Affect My Tax Returns?
Contra dealing is a fantastic way to leverage your existing goods and services by bartering your expertise and surplus equipment for vital new stock, inventory and items. However, it’s vital to remember that even though no hard cash is changing hands, the value of the assets you exchange with another party must to be accounted for in your tax return.
How should I account for contra deals?
The way in which contra deals are recorded in your accounts should reflect the value of the assets you’re exchanging – a laptop that would normally sell for £500 should be recorded as having been sold at market value, even if no money actually changes hands during the transaction. Doing so provides a record of the transfer so that you can prove to HMRC where your stock has gone; if it simply disappears from your inventory, there’s no accounting for it anywhere, leading to questions.
Does this mean I have to pay tax on contra deals?
If the goods you’re exchanging with someone else are of equal or greater value to what they’re giving you in return, then no, you won’t need to pay any more in tax. This is because the goods which you acquire through a contra-deal can be recorded as a business expense, one that is a tax write-off, and if this equals or exceeds the sum of the goods you have exchanged then the tax deduction cancels out the value of the purchase – your total value has not increased, so no tax is payable. You will, however, still need to account for VAT.
How should I account for VAT in a contra deal?
When contra-dealing, you are “selling” a product to another company, and they are “selling” one to you – the only difference is, neither of you actually pays. Instead, you exchange the goods. From the government’s point of view, this means that each party is still liable for the VAT on their sale. Since you’ve not actually received any money during the deal this can potentially leave you out of pocket, so be sure that the deal you’re arranging is fair to both parties before moving forward with it. You must also trade your product at a fair and reasonable price that a customer or merchant under no duress would happily accept – it’s not possible to “sell” your £500 laptop for £1 in order to avoid VAT!
The same principle applies to part-exchanges as to full contra-deals; if you accept a cash payment of £250 and an office printer for your £500 laptop, you must treat this identically to a £500 sale and account for VAT accordingly.
Though it may sound complex, the laws surrounding contra-dealing and tax are designed to mirror those regarding normal sales. For more information, and some examples of situations where contra-dealing is taxable, visit the gov.uk page handling VAT and part-exchanges.