Businesses often exchange goods or services without using money. These are called barter transactions. Many people don’t know how to calculate VAT in such cases. They get confused about the value of the exchanged items, which can lead to wrong tax reporting or even penalties.
When two businesses swap services, both parties must correctly declare and pay VAT. Without proper knowledge, errors are easy to make. To fix this, the UAE’s Federal Tax Authority (FTA) has shared a public clarification. This article explains that clarification in simple words, helping you stay compliant with the law.
Tax Gian, one of the expert tax agents in the UAE, provides top-notch consultation in VAT and other tax matters such as corporate tax and transfer pricing.
What Are Barter Transactions?
Barter means an exchange of goods or services without using full cash payments. In VAT terms, when two parties give something of value to each other, it’s called a barter.
Each party makes a supply and receives something in return. That’s why there are at least two supplies in every barter deal. Even though money might not be involved fully, the normal VAT rules still apply.
What Counts as Value in Barter Deals?
In regular deals, the value of supply is the money received minus the VAT. But in barter, the value is based on what is received in return, which may not always be cash.
Here’s how it works:
- If you get only goods or services in return, the value is the fair market price of what you got.
- If you get both cash and goods/services, the value is the total of both ; still excluding VAT.
Let’s say you’re a social media influencer and you promote a restaurant. They pay you AED 900 in cash and give you a meal worth AED 100. The total value of your service is AED 1,000. VAT must be calculated from this full amount.
If you are having problems understanding Barter Transactions, ask expert VAT consultants in Dubai.
How to Determine Market Value?
To find out the market value of a good or service received in barter, follow these steps:
- Check the Regular Price: Use the amount the same item usually sells for in the UAE when sold freely between unrelated parties.
- Use Similar Substitutes: If that item is not sold openly, find a similar item sold under the same conditions.
- Use Replacement Cost: If neither of the above works, use the replacement cost of the same or identical good/service.
Each party must apply these steps to figure out how much VAT to charge and report. Still confused? Consult expert tax agents in Dubai.
Mixed Consideration in Barter
Sometimes, barter involves both money and non-money value. For example:
- A furniture dealer agrees to give new office furniture to an accounting firm.
- The furniture is worth AED 45,000 (including VAT).
- In return, the accounting firm provides services worth AED 15,000 and also pays AED 30,000 in cash.
Here, the total value is still AED 45,000. The accounting firm must account for VAT on the AED 15,000 services it gave. The furniture dealer does the same for the full value of the furniture.
Issuing Tax Invoices
Even if money isn’t exchanged, VAT invoices are still required.
If both parties are VAT-registered, they must each issue a tax invoice for what they are supplying.
Here’s what’s needed in the invoice:
- Value of the supply (excluding VAT)
- VAT amount
- Total amount (including VAT)
In the case above:
- The furniture dealer must issue an invoice showing the furniture value of AED 42,857.14 plus AED 2,142.86 VAT (totalling AED 45,000).
- The accounting firm must issue an invoice showing AED 14,285.71 plus AED 714.29 VAT (totalling AED 15,000).
Ask more about correct invoicing from expert tax consultants in Dubai.
Who Needs to Follow This?
This rule applies to anyone registered for VAT in the UAE. Whether you’re trading services, products, or both, if a barter deal is involved, you must use these methods to calculate and report VAT.
You also need to issue proper tax invoices for the part of the transaction you are responsible for.
How can Tax Gian Help?
Barter deals might seem simple, but they can get tricky with VAT. Many people ignore or misunderstand the tax rules when no cash is involved. Tax Gian, an expert tax agent in the UAE, helps where businesses trip. By giving you the correct guidance on methods to value barter supplies and strategies to generate proper invoices for VAT, our expert tax agents help businesses avoid VAT troubles.
Need to double-check a barter deal’s VAT value or any other VAT problem? Ask our experts at Tax Gian.
