VAT implications of barter transactions

Occasionally property transactions can involve the giving or receiving of so called ‘consideration’ in addition to a more usual financial transaction. These deals are termed ‘barter transactions’ and it is important to understand the VAT implications to ensure that there are no unexpected costs.

We recently advised a client who was subsequently spared a £20k VAT bill thanks to a bit of careful planning. The client was a landlord who was non-VAT registered and he had a tenant who had a VAT registered company.

The tenant agreed to carry out refurbishment works costing £100k plus standard rate VAT (£20k) in recognition of a rent-free period. The premises involved were residential so there was no ‘option to tax’. This arrangement would have resulted in a VAT cost of £20k to the landlord which could not be recovered.

We found a solution for the client which removed the VAT cost entirely. This involved the landlord charging £100k rent to the tenant which was VAT exempt and for the tenant to engage the builders directly to complete the works – the tenant as a VAT registered company was able to recover the VAT input tax and so £20k VAT was saved by the client.

Whilst this is a simple example of how it can affect smaller transactions in the property market the barter system can also arise in more complex property transactions, such as a sale and leaseback. It is important that the VAT implications of such transactions are properly addressed.

Contact Carolyn.vanhecke@cowgills.co.uk if you would like any more information or advice.