How is tax applied to bartering? Key tax rules for businesses that barter

Bartering is a way to exchange goods and services. It has been around for centuries, predating the introduction of currency. However, using currency led to the integration of barter transactions into tax and VAT systems, as they’re treated as cash transactions and are often taxable.

The way tax is applied to bartering has evolved as the intricacies and nuances of bartering have influenced updates to the tax system itself.

Participants must refer to market data and historical sales to ascertain the fair market value of bartered goods and services. This forms the basis for how bartering is taxed.

This article will cover the tax rules for bartering, how to value barter transactions, how to treat bartering across different types of tax, and how to report barter transactions, as well as sharing practical tips and the common mistakes to avoid.

What are the tax rules for bartering?

Calculating tax for barter transactions involves assigning value to non-monetary goods or services that are exchanged.

All participants in a barter transaction must keep detailed records of the items exchanged, their fair market value, and the transaction date for tax reporting purposes, so there is a record of the agreed value, and to avoid disputes with HMRC.

Businesses that barter for commercial purposes will face tax obligations. The value of the goods received from the barter exchange must be counted as revenue.

The tax liability for bartering can be cancelled or ‘contra’d’ once transaction reporting for each tax is completed. However, both parties should account for VAT for each separate supply, even if no money is exchanged.

For instance, if two VAT-registered companies barter items with an agreed fair value of £1,000 each, they must still report the transaction for tax and VAT purposes. They can swap the goods, but should still each pay the VAT liability of £200 to each other to pay the right amount of VAT. The taxman does not accept a barter for liability to them!

Globally, there are different rules governing bartering, which makes international barter transactions challenging for accounting and tax reporting purposes. Businesses should consider getting specialist tax advice to ensure they pay the correct tax and comply with all rules.

How to value barter transactions

Any exchange of goods and services is classed as a taxable event. This means both parties must report the fair market value of the goods and services exchanged as income.

Coming to a mutual agreement on the fair value of a bartered good can be challenging. Unlike monetary deals where the price is fixed, bartering requires both parties to agree on the relative worth of the goods or services they offer. This can be personal and subjective and lead to disputes. Therefore, it is sensible to have a written agreement of the terms of a barter deal.

“To figure out how much tax you owe, you need to know the fair market value of what you traded,” said Yiannis Zourmpanos, a financial consultant and senior contributor at Bountii. “The fair market value is what you would charge if you were selling the item or service for cash.”

In a barter exchange, your income is the fair market value of the goods or services you received, less the agreed value of the goods or services you gave as part of the barter exchange.

Historically, the value of bartered goods can vary. This could be based on scarcity of the item and the need for it within a community. We still see this in society today, for instance, demand for fans increases during a hot spell.

Bartering is also evolving online – for instance, companies can trade online advertising space with each other – but, as with any barter transaction, the monetary value still needs to be counted as taxable income. The two parties can agree the fair value as the value they would charge another customer in the normal course of business.

Cryptocurrency trading is another type of bartering, involving the exchange of digital assets without using traditional currency. Digital platforms and cryptocurrency exchanges are likely to have a significant impact on the evolution of bartering, meaning tax authorities will have to apply and integrate new laws around reporting and taxing barter exchanges.

VAT and bartering

With a barter transaction, both parties must account for VAT based on what they would have paid for the goods or services if no barter had occurred and the deal had been paid for with money.

When accounting for VAT on a barter transaction, the first step is to decide if VAT applies to the goods and services exchanged.

If VAT applies, the next step is to assign a fair market value for the goods. This forms the basis of the VAT calculation. VAT is applied to this value using the applicable VAT rates.

Currently, the UK VAT rate is 20% for most goods and services, so for example, VAT on goods with a fair value of £600 equals £120, taking the total transaction value to £720.

If both parties involved in the transaction are registered for VAT, they should include this information in their financial accounting records and VAT returns.

It is important for startups to record the transaction for VAT purposes at the time of supply and report it in the correct quarterly VAT return using the correct tax point.

Income tax, NI, and corporation tax and bartering

As bartering transactions are treated as cash transactions, there is potentially a liability for all taxes. This means a self-employed sole trader should include the fair value of barter exchanges as part of their financial reporting on their self-assessment tax return.

Businesses that use bartering for some transactions must include details of relevant transactions agreed at a fair value in their corporation tax returns.

National Insurance (NI) is not usually liable directly from bartering. However, for self-employed sole traders who pay NI linked to their taxable profits, bartered income forms part of that.

How to report barter transactions

The most vital consideration when reporting and paying tax on barter transactions is VAT. This is because, while the actual goods or services can be bartered without the exchange of physical currency, they should be reported as if cash were used, and any VAT due must be actually accounted for and paid for as if cash were used.

As barter transactions must be treated like cash transactions, they need to be reported as any business reports its sales and purchases. This could be via a corporation tax return or a self-assessment tax return for sole traders.

“They should be recorded at fair market value in the financial accounts and included in the tax returns as if they were normal sales and purchases,” said Andrew Gosselin, personal finance expert and Chief Financial Strategist at The Calculator Site.

For instance, if a company barters or swaps a PC valued at £800, they must record the transaction at that value, even though no money is exchanged. This provides an audit trail and enables businesses to show HMRC how they have disposed of an item or transferred stock.

Common mistakes with bartering and tax, and how to avoid them

Getting the fair value of bartered goods and services wrong is a common pitfall that businesses should avoid. It’s difficult because the two parties have to agree and, naturally, both want to get a good deal. As with any commercial transaction, the price should be determined by the value each party places on the goods or service, and how much they are willing to pay.

“SMEs should also be aware of not accounting for VAT correctly, and failing to maintain proper records,” said Gosselin. “To avoid this they should consult with a tax professional.”

Practical tips for startups

Bartering can be a useful option for startup businesses with tight cash flow and an inventory of goods they can exchange. Bartering avoids using physical cash to acquire stock or services, but a barter should be accounted for and tax paid as if it were a cash exchange.

Bartering is also a way to update the value of goods or services, linked to demand, which can help businesses create flexible and innovative sales techniques to maximise profit when supply is limited.

“Know the tax rules, keep detailed records, and pay careful attention to VAT payments to barter without any tax troubles,” said Zourmpanos.

Find out more about accounting for VAT on barter transactions.

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.