Does trading goods and services in-kind increase corporation tax?
No, trading £500 worth of goods and services for £500 worth of goods and services does not increase your corporation tax, providing that the goods and service you aquire qualify as a legitimate business expense.
Example 1: A printer trades £500 worth of printing leaflets to be inserted into a local newspaper. The local newspaper publishes an advert promoting a promotion on behalf of the printer, worth £500.
The expense qualifies as legitimate business expenses for both businesses and will net off, so whilst they will increase the turnover of an enterprise, there will be no increase in taxable profits.
Example 2: A coffee shop trades £300 worth of credits with their coffee shop with an architect who has submitted a planning application to use the pavement outside for tables and chairs.
The architectural practice can spend his coffee shop credits on any legitimate business expense, such as:
- Client meetings that involve billable hours
- Staff Christmas / Annual Party – up to £150 per member of staff
They may also exchange their credits with another member who has credits from a local enterprise whose goods and services they need.
Can I give credits to my staff?
Yes you can. Awarding credits to staff falls within the scope of employee benefits and would usually attract national insurance and income tax. However, in some circumstances these benefits are tax-exempt.For example, £216 per annum that can be paid to members of staff who work from home. Further information can be found from HMRC here: http://www.hmrc.gov.uk/helpsheets/hs207.pdf
Pension contributions are also tax-exempt, so an employee could use the opportunity of receiving credits to make additional pension contributions. For example, an employee is paid £100 per month in credits from a local supermarket. They make a corresponding pension contribution of £100 per month through salary sacrifice. No additional income tax and national insurance is due. The employee uses their credits instead of cash to pay for £100 per month worth of grocery shopping and they have made an additional contributed £100 per month into their pension.
How does it work with VAT?
If neither of the enterprises involved with the exchange are VAT registered there should not be any VAT due from either enterprise. However, the turnover of the enterprises will increase. Therefore, if the either or both enterprises are close to the VAT threshold, they should be aware that it could trigger VAT registration. The current threshold for VAT registration is currently £81,000. Click here for further information from HMRC.
If both enterprises are VAT registered, they will both be obliged to create invoices that include VAT and report them on their VAT returns. If the goods and services being exchanged attract VAT at the same rate, the VAT with net off to zero. If they do not, the enterprise supplying goods or services with the lower rate of VAT will be obliged to make up the difference on their VAT return. In addition, if one enterprise receives goods or services and issues the other enterprise with credits, the VAT would only net off when the second invoice is generated, not when the credits are issued.
If one enterprise is VAT registered and the other is not, the enterprise supplying the goods and services that attract VAT will be obliged to include VAT on their sales invoice and in their VAT return. They will have to pay VAT on the goods or services they have supplied as if they were paid for in cash. In such instances, we recommend agreeing a swap based on values that exclude VAT and agree for the VAT to be paid separately in cash.