Payments In Kind allow businesses to pay for goods or services using something other than money.
For example: A plumber might repair an electrician’s bathroom in exchange for electrical work. Both businesses receive valuable services without making cash payments.
Businesses commonly call this kind of arrangement “bartering”.
Payments In Kind can also involve a combination of money, goods and services. Therefore, HMRC treats many of these arrangements like ordinary business transactions. Consequently, businesses cannot ignore the value of these exchanges when calculating their income.
How Payments In Kind Work
Imagine a graphic designer needs some office furniture. Meanwhile, a furniture supplier needs a new company logo.
Instead of exchanging money, both businesses agree to swap their products and services. The designer creates a logo worth £500 and, in return, the supplier provides office furniture worth £500.
Both businesses benefit from the exchange without spending cash. However, each business must still consider the transaction’s implications.
Tax on Payments In Kind
HMRC usually treats the value of goods or services received through business trading as taxable income. Therefore, businesses must include this value when calculating their trading income.
For example: A self-employed tradesperson might receive equipment worth £1,000 in exchange for completing a job. That £1,000 would generally count towards their business income.
Additionally, the business may also claim allowable expenses relating to the transaction. The overall tax liability depends on the business’s profits and circumstances.
Sole traders pay Income Tax on taxable trading profits. Meanwhile, limited companies pay Corporation Tax on their taxable profits.
VAT on Payments In Kind
VAT can also apply to Payments In Kind, even when no money changes hands.
HMRC treats barter transactions as two separate supplies. Each business supplies something and receives something in return. Therefore, VAT-registered businesses must account for VAT on their taxable supplies.
For example: Two VAT-registered businesses might exchange standard-rated services worth £500 each, excluding VAT. Each business would charge £100 VAT on its own supply.
Each business may also reclaim VAT on its purchase, subject to the usual rules. HMRC uses the normal cash price of the goods or services when determining their VAT value.
Contact Us
We are not just accountants; we are Chartered Accountants with one of the most reputable and premium accounting bodies. We are registered and regulated by ACCA; so you can rest assured that you are in good hands. Knowing this, don’t hesitate to get in touch with us if you require assistance: Pi Accountancy | Contact Us
This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.