Bartering has been a technique used for centuries to achieve gains through mutually beneficial trade. It comes in many different forms and a lot of companies chose to do it as a way to get to grips with their cashflow or just make their business more efficient in general.
Despite the benefits, one of the reasons many do not enter the barter market is due to confusion over its legality. A question for many is ‘do I have to pay tax on the goods and services I trade?’ and ‘is it legal?’. In this article, we break down the answer to both questions.
- Bartering is legal but it must be conducted in the right way
Whilst bartering is an activity that not many people conduct in their businesses, it is in fact entirely legal. Now there are some technicalities to consider (i.e. you can’t trade in the use of illegal goods and services) however once you consider them you can make a judgement as to how the courts would view your activity. Bartering has benefits, however for it to be legal you must consider the potential tax implications.
- You must pay the proper tax when trading goods and services
Say you are a digital marketing freelancer who works for a variety of different clients and you do some work for the office which you rent desk space from. In this situation, the office would have to pay rent on the nominal income that they would get from the rent. Similarly, you must pay tax on the notional income you receive from the work. It is also worth keeping in mind that the same rules apply in terms of tax deductibility. For example, you could not perform digital marketing work in exchange for the rent of your home.
A look at bartering and VAT in the UK
All VAT registered companies must charge VAT on all taxable products and services that they deal in as a company. When it comes to contra deals and barters, the UK government specifies that the right tax point will need to be used to ensure any transaction is on the correct VAT Return.
There are two supplies that you must consider in a barter transaction; the supply from your customer and the customers supply to you. VAT must be accounted for on both supplies that have been received without the exchange of money.
Start bartering today to take advantage of the benefits
Hopefully, that has cleared up some of the common misconceptions about contra dealing and bartering between businesses. Remember that whilst there may not be the tax benefits to bartering than you hoped for, trading services instead of cash with businesses can save time both in terms of invoicing and negotiating contracts. Both these and other activities that are involved in cash transactions will cost your business time and money.