Summary
- VAT can be due even when no cash changes hands. Barter arrangements, part-exchanges and other non-monetary consideration can create an output VAT liability.
- Recharged costs to associated businesses are normally subject to VAT as a management service, while rental income is generally exempt unless the property has been opted to tax.
- Entries through inter-company loan accounts can create VAT liabilities in the same way as cash payments where taxable supplies are involved.
- Output VAT may also apply to business gifts over £50 per recipient, private use of business assets and goods taken for personal consumption.
Your business has submitted repayment returns for the last two quarters and you are concerned that you might have underpaid output tax on some supplies where no money has changed hands. Are your concerns justified?
Consideration and supply
The starting point with VAT is that you have supplied goods or services to a customer, which are taxable under UK legislation, and your business must therefore account for VAT on the consideration that you have received for these supplies. The term “consideration” has been the subject of much debate over the years but basically means that output tax declarations are based on all payments that you have received in both monetary and non-monetary formats.
Example. Window cleaner John gets free membership at his local golf club as long as he cleans the clubhouse windows every four weeks. John has received consideration including VAT based on the value of his club membership. This is an example of a barter transaction.
A common error is to forget to account for VAT on part-exchange transactions. They are common in many industries, e.g. a farmer trading in their combine harvester for a new model.
Management services and recharges
If your business incurs costs on behalf of an associated business or another third party, such as shared telephone bills or other premises costs, you must add VAT if you recharge them as a management service. As long as the costs have been charged to your business by the suppliers, and they do not belong directly to the third party, you can claim input tax because you have made an onward supply and charged VAT. You will not charge VAT to another business sharing your premises if it relates to a rental arrangement, i.e. they get a clearly defined part of the building for their sole use to the exclusion of all others. The rental income is exempt from VAT.
The exception to rental income being exempt is when you have opted to tax the property with HMRC, in which case it will be standard-rated.
Inter-company loan accounts
If you charge a third party for goods or services through an inter-company loan account, the debit entry (debtor) will create a tax point and an output tax liability if the posting relates to a supply of taxable goods or services that you have made. In other words, the entry has the same VAT status as a payment of money into your bank account.
Some businesses transfer assets via inter-company loan accounts, often because the transferor has positive cash flow and does not require immediate payment. You should review your fixed asset register if this situation is relevant.
Deemed supplies and business gifts
If you give away goods for business purposes, there is no output tax liability if the value of the goods given to the same person or business in a rolling twelve-month period is less than £50 excluding VAT. However, if you exceed this figure, output tax is payable on the full value of all goods, including the first £50. An example of a deemed supply, also subject to output tax, is when you buy a business asset and reclaim input tax but then use that item for non-business or private purposes. There is an output tax liability in each period on the value of the benefit.
Output tax is also payable on goods used for your own consumption, such as a publican consuming free drinks from the bar.
