VAT on Part-Exchanges, Barters and Set-Offs

When your business exchanges goods or services rather than paying cash, you still need to account for VAT properly. Whether you're accepting a trade-in, swapping services with another business, or offsetting invoices against each other, HMRC treats these as taxable supplies and expects you to charge VAT on the full value of what you provide.

What counts as a non-cash transaction

Part-exchanges, barters and set-offs are all situations where goods or services change hands without a straightforward cash payment. These transactions are still taxable supplies for VAT purposes, which means if you're VAT-registered, you must charge VAT on them just as you would on a normal sale.

The key principle is simple: you must account for VAT based on what the transaction would have been worth if money had changed hands instead of goods or services.

Part-exchange transactions

A part-exchange happens when you supply goods or services and accept other goods or services as part or full payment. A common example is a sports shop selling a £200 surfboard for £100 plus the customer's old board.

When you account for VAT on a part-exchange, you must charge VAT on the full monetary value the customer would have paid if they'd paid entirely in cash. In the surfboard example, you charge VAT on the full £200 value, not just the £100 cash portion.

The goods you receive in part-exchange (like the old surfboard) represent the balance of the payment. You don't charge VAT on what you receive – you charge it on what you supply.

Reconditioned units

If your business reconditions items and exchanges reconditioned units for unserviceable ones, you must charge VAT on the full amount you charge for the reconditioned unit.

When you receive an unserviceable unit in part-exchange, you have two options:

• Leave the original VAT charge as it stands
• Issue a credit note to adjust the transaction

Issuing a credit note can be helpful if your customer plans to reclaim the VAT on the unserviceable unit they've given you.

Barter transactions

A barter involves swapping goods or services without any cash changing hands. For VAT purposes, a barter creates two separate supplies:

• Your supply to the other party
• Their supply to you

Both parties must account for VAT if they're VAT-registered. Each business must charge VAT on the value their goods or services would have commanded if they'd been paid for in money.

For example, if a web designer agrees to build a £1,000 website for an electrician in exchange for £1,000 worth of electrical work, both businesses must charge VAT on £1,000 worth of supplies, even though no money changes hands.

Set-offs and contras

A set-off (also called a 'contra') happens when two businesses owe money to each other and agree to cancel out one debt against the other. This might result in:

• No payment if the amounts are equal
• A balance payment if one debt is larger than the other

Sometimes businesses agree to accept goods or services instead of payment. For example, a garage owner might repair a newsagent's van in return for cancelling last month's newspaper bill.

VAT treatment of set-offs

If both businesses involved in a set-off are VAT-registered, you must both account for VAT on each separate supply you make to each other. This applies even if:

• No money changes hands at all
• Only a net balance is paid after setting off the debts

Each business must treat their supply as a normal taxable sale and charge the appropriate VAT.

Record keeping for set-offs

You must maintain proper documentation for set-off transactions, including:

• Sales and purchase orders for each supply
• Shipping information where goods are involved
• Entries in your accounting records showing each supply separately

Don't just record the net amount – show each supply as a separate transaction in your books.

Tax points for non-cash transactions

The tax point (also called 'time of supply') determines which VAT Return period a transaction belongs to. For part-exchanges, barters and set-offs, you need to establish the correct tax point to ensure you account for VAT in the right period.

For set-offs specifically, the tax point depends on how you record the transaction:

• If you issue an invoice, the tax point is the date of the invoice and you must account for VAT at that time
• If you record the set-off by making an entry in your books showing the amount is no longer outstanding, the tax point is when you make that entry

In all cases, you must account for VAT on the full value of your supply at the appropriate tax point.

Practical implications

The main takeaway for your business is that you cannot avoid VAT simply by trading goods or services instead of using cash. HMRC requires you to:

• Identify the monetary value of what you're supplying
• Charge VAT on that value as you would for a cash sale
• Issue proper VAT invoices where required
• Record each supply separately in your accounts

This applies whether you're accepting an old item in part-exchange, bartering services with another business, or agreeing to set off mutual debts.

Sources

• VAT: part-exchanges, barters and set-offs

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.