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TaxationWeb by Julie Butler, FCA

Julie Bulter FCA, of Butler and Co, outlines the tax considerations of an ancient form of commerce in the context of modern day businesses.The rural community has thrived on the concept (and reality) of the system of ‘Barter’ for centuries. In the majority of rural communities most of the population has known each other for generations and a large number of the inhabitants are related to each other and with that comes trust (or bitter disputes) – but let’s concentrate on ‘Barter’ and trust.

It is quite normal for ferreted rabbits to be swapped at the local butchers shops for pork chops, or for grazing to be exchanged for field maintenance. Hay bales can act as currency in return for building work, home made cakes and repairs to vehicles etc. All very innocent, rustic and encourages a paper free environment but this can underpin what can only amount to potential income tax, corporation tax or VAT non-disclosure or even fraud.

‘Contemporaneous’ accounting records

That might sound harsh but it is the hard fact. The dream of a paperless rustic society has to be shattered and simple tax legislation and the self-assessment requirement to keep good books and records intervenes. The enquiry specialists will explain the need to keep ‘contemporaneous’ records.

‘Barter’ is not exclusive to the country communities - it is happening in the urban and suburban communities as well, e.g. painting and decorating work in exchange for motor repairs, building work in return for legal services etc. Another, well-documented area is bartering in the advertising industry, where customers provide free advertising space to their advertisers. The opportunities are endless.

Market value and production of the sales invoice

Clearly the service or product provided must be at market value (Sharkey v Wernher) and a ‘contemporaneous’ sales invoice must be made with sequential sales/fee invoice number and date. The business records must show how the invoice was settled, perhaps via a drawings journal or by the settlement of a purchase ledger invoice. Advice regarding the recording of such revenue is given in the Inland Revenue Booklet ‘Self Assessment – A General Guide to Keeping Records’. To quote direct from the booklet:

'Even if you do not record these through a till, you will need to make a record at the time the transaction takes place of the goods taken or supplied and their retail selling price.'

Entertainment

It is important here to refer to BIM45020, Specific deductions: Entertainment: Expenditure which is not allowable. (Expenditure that is incidental is also not allowable). This quotes:

'Expenditure on business entertainment is not allowable as a deduction against profits, nor may a deduction be made for any expenditure, which is incidental to business entertainment.

Traders may obtain entertainment through ‘Barter’ arrangement in which their own goods or services are exchanged for hospitality. The amount to be disallowed is larger of:

- the value at which the transaction is recognised in the profit and loss account; and,

- the cost of the goods or services exchanged for business entertainment.'

Correct VAT treatment

The VAT invoices must not only be recorded in the correct VAT quarter but the correct amount of output VAT must be charged and reclaimed. There are actually bartering companies in the UK who offer bartering services to a whole range of businesses. This is a growing industry. Even in this complex corporate environment, the payment of VAT is always required.

Inheritance Tax (IHT) consequences

In the farming community (with the average age of a farmer being high) it is possible for (in all innocence) the majority of farming activities to be dealt with via a simple ‘Barter’ arrangement, e.g. grassland exchanged for farm maintenance. If the ‘Barter’ transactions are not reflected, the farm accounts might show almost no activity, how would this affect a claim for agricultural property relief (APR) under s.115 IHTA 1984? Could it be proved that the land qualifies for APR or BPR? Could it be proved that the trade of farming was being undertaken?

Capital Gains Tax (CGT) consequences

What if part of the above farmland was to be subject to development? Would the land qualify for business asset taper relief (BATR) for CGT?

In order to claim Rollover relief or Business Asset Taper Relief (this can lead to the magical 10% rate of Capital Gains Tax) it is essential to show that any of the farming assets are business assets, i.e. assets used in the business. If all the activities are sheltered via ‘Barter’ it is tricky to prove that the land is actually a business asset, if for example, a parcel of the land were to become available for development, it could be very tempting for the Inland Revenue to challenge whether this is actually a business asset used in the business because it is not supported by the business accounts and ‘contemporaneous’ records. This is another example where unrecorded ‘Barter’ could work against the taxpayer in the claim for reliefs.

IAS – what is the correct accounting treatment?

The Institute of Charter Accountants in England and Wales summarise the accounting treatment under IAS 18 as follows:

'Revenue is measured at the fair value of the consideration received or receivable. The consideration is usually cash. If the inflow of cash is significantly deferred, and there is no interest or a below-market rate of interest, the fair value of the consideration is determined by discounting expected future receipts. If dissimilar goods or services are exchanged (as in barter transactions), revenue is the fair value of the goods or services received or, if this is not reliably measurable, the fair value of the goods or services given up.'

Further to this the International Accounting Standards Board interpretation SIC – D31 states:

'However, a swap of cheques, e.g. for equal or substantially equal amounts between the same enterprises that provide and receive advertising services does not provide reliable evidence of fair value.'

Action by Tax Advisers

So what actions should be taken by tax advisers?

Clearly it is important to talk to clients to explain that undocumented and unrecorded ‘Barter’ is actually as dangerous and illegal as the ‘black economy’. Explain that innocent ‘Barter’ can actually jeopardise future IHT and CGT reliefs in the fact that there appears to be no business activity where in fact, there is! ‘Barter’ is found at all levels within our clients activities and the key has to be client awareness.

September 2005

Article supplied by Julie Butler F.C.A., Butler & Co, Bowland House, West Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email; j.butler@butler-co.co.uk.

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd edition) and Equine Tax Planning ISBN: 0406966540, published by Tottel Publishing.