Business tax – guidance

VAT: part-exchanges, barters and set-offs

How to account for VAT on goods that you give away, exchange or offset.

Overview

If you’re registered for VAT, you must charge VAT on all taxable supplies of goods or services that you make. ‘Supplies’ can be day-to-day sales as well as other transactions such as free samples, part-exchanges, barter transactions and set-offs. You might also acquire goods or services for your business through these sorts of transaction.

Tax points

A tax point, or the ‘time of supply’, is when a transaction takes place for VAT purposes. If you make any part-exchanges, barters or contras you’ll need to check that you’re using the right tax point so each transaction is on the right VAT Return.

Exchanges

There are various circumstances when you might receive goods from your customers in return for supplying them with goods or services. The VAT treatment depends on the nature of the transaction.

Reconditioned units

If your business provides a reconditioning service and supplies reconditioned units in exchange for unserviceable ones, then you must charge VAT on the full amount you charge for the reconditioned unit.

If, in part-exchange for the reconditioned goods your customer gives you an unserviceable unit, you can either:

  • agree with the customer to leave the original VAT charge as it is
  • issue a credit note

You might also want to do this if your customer is planning to reclaim the VAT.

One-off exchanges

You might exchange 1 item for another, or exchange goods for other goods at a reduced price, on a one-off basis. For example, a sports shop might sell a £200 surfboard for £100 plus the customer’s old board. You should treat this sort of transaction as a part-exchange.

Part-exchanges

If you supply goods or services and receive other goods or services in exchange (or part-exchange) you must account for VAT on the amount the customer would have paid you if they had given you money instead.

Barter transactions

If you supply services or goods and receive other goods or services in payment, there are 2 separate supplies:

  • the supply from you to your customer
  • the supply from your customer to you

You must account for VAT, and so must your customer if they’re VAT-registered. The VAT treatment is the same as for part-exchanges. You must both account for VAT on the amounts you would each have paid for the goods or services if there had been no barter and they had been paid for with money.

Set-offs

If you and another person owe money to each other you might agree to set 1 amount off against the other. This type of transaction is known as a set-off or ‘contra’. If the:

  • amount you owe each other is the same, neither of you will have to pay anything
  • other person owes more than you, they’ll only pay you the balance after setting off what you owe them

Sometimes you might agree to accept goods instead of payment. For example, a garage proprietor might agree to repair a newsagent’s van in return for their cancelling last month’s newspaper bill.

If both businesses involved in the transaction are registered for VAT, you must both account for VAT on each separate supply you make to each other. You have to do this even if no money changes hands, or if you pay only a net amount after setting off 1 outstanding balance against the other.

You must keep sales and purchase orders, and shipping information for each supply as well as making the entries in your accounting records.

Like all other transactions, you’ll need to check that you’ve got the tax point right. The date of the tax point depends on whether you issue an invoice or you just record the set-off in your accounting records. If you:

  • issue an invoice, the tax point is the date of the invoice and you must account for the VAT at that time
  • set off supplies or mutual debts by making an entry in your books to show that the amount is no longer outstanding, the tax point is when you make the entry. You must account for VAT at that time on the full amount of the supply