In this section:
- Returned goods, credit notes, debit notes and VAT
- Private use of goods or services, self-supply and VAT
- Samples, part-exchanges, barters, contras and VAT
- Instalment payments, deposits, credit sales and VAT
- Lost, stolen, damaged or destroyed goods and VAT
Samples, part-exchanges, barters, contras and VAT
If you're registered for VAT, you must charge VAT on all taxable supplies of goods or services that you make. 'Supplies' can be day-to-day sales as well as other transactions such as free samples, part-exchanges, barter transactions and contras - also known as 'set-offs'.
You might also acquire goods or services for your business through these sorts of transaction.
This guide explains know how to deal with samples, part-exchanges, barter transactions and set-offs so that you can enter the correct amounts of input and output tax on your VAT returns.
On this page:
- Tax points
- VAT and samples
- VAT on exchanges
- VAT and barter transactions
- Contras or set-offs
- More useful links
Tax points
A tax point, or the 'time of supply', is when a transaction takes place for VAT purposes - and this is for goods and services. If you make any of the transactions in this guide, you'll need to check that you're getting the right transaction on the right VAT return.
Find out more about tax points and when payments are due
VAT and samples
You don't have to account for VAT on a free sample you give to another person or business if you meet certain conditions.
General conditions
The first condition is that you mustn't charge for the sample. It must be genuinely free and you can't receive anything in return for it.
The second condition is that the sample must be an example of one of your products and you must give it for a genuine business reason. Advertising your products to the public would be a genuine business reason, but giving a sample as a present for personal reasons wouldn't.
The third condition is that you must give only one identical, or virtually identical, sample of each product to the same person. If you give more than one sample to a person or business, you must account for, and pay VAT on, all of them except for one. The exceptions are if you give the samples:
- for QA testing purposes
- to a third party to give one each to members of the public
Samples given for testing
You can give more than one sample to a person without having to account for VAT if:
- you give them for quality assurance testing, either on your own behalf or by a potential customer
- all the general conditions are met
Samples given to the general public via a third party
You might decide to give free samples to advertise your products to members of the public. You could do this by engaging a third party, such as a business promotions company, to distribute them. Or you could give the samples to a client so that they can give one to each of their customers. An example would be a sweet manufacturer that gives retailers samples of a new chocolate bar to give to customers so they can try it.
You won't have to account for VAT on any samples distributed to the general public by a third party if you meet all of the following conditions:
- neither you nor the third party charge for them
- you supply them for genuine business reasons and they're a typical example of your products
- the final customer receives only one example of each product
- the samples remain your property until they're given to the final customer
- any samples that aren't used are returned to you or destroyed
You might receive free samples yourself. If you sell any samples that were given to you, you must account for VAT on the sale.
VAT on exchanges
There are various circumstances when you might receive goods from your customers in return for supplying them with goods or services. The VAT treatment depends on the nature of the transaction.
VAT on reconditioned units
If your business provides a reconditioning service, supplying reconditioned units in exchange for unserviceable ones, then you must charge VAT on the full amount you charge for the reconditioned unit. Reconditioning services include, for example, providing spare parts for cars, domestic appliances and other machinery.
If, in part-exchange for the reconditioned goods your customer gives you an unserviceable unit, you can either:
- agree with the customer to leave the original VAT charge as it is
- issue a credit note
You might also want to do this if your customer is planning to reclaim the VAT.
Find out more about reconditioned units
Find out more about VAT and credit and debit notes
VAT on one-off exchange units
You might exchange one item for another, or exchange goods for other goods at a reduced price, on a one-off basis. For example, a sports shop might sell a £200 surfboard for £100 plus the customer's old board. You should treat this sort of transaction as a part-exchange.
VAT and part-exchange
If you supply goods or services and receive other goods or services in exchange (or part-exchange) you must account for VAT on the amount the customer would have paid you if they had given you money instead.
Example
The sale price (including VAT) of a camera is £115. If you sell it for cash, the price (excluding VAT) is £100 and you must account for £15 VAT.
If, instead of selling it for cash, you exchange it for £70 plus the customer's old camera, you must still account for VAT based on the sale price of £115 and the VAT due to HM Revenue & Customs (HMRC) would be £15.
VAT and barter transactions
If you supply services or goods (new or second-hand) and receive other goods or services in payment, there are two separate supplies:
- the supply from you to your customer
- the supply from your customer to you
You must account for VAT, and so must your customer if they're VAT-registered. The VAT treatment is the same as for part-exchanges. You must both account for VAT on the amounts you would each have paid for the goods or services if there had been no barter and they had been paid for with money.
Set-offs
If you and another person owe money to each other you might agree to
set one amount off against the other. If the amount you owe each other
is the same, neither of you will have to pay anything. If the other person
owes more than you, they'll only pay you the balance after setting off
what you owe them. This type of transaction is known as a set-off or 'contra'.
You might have an account with another business that you settle up from
time to time, with each of you just paying the balance after setting off
what the other owes. This reduces the number of payments you each have
to make. Sometimes you might agree to accept goods instead of payment.
For example, a garage proprietor might agree to repair a newsagent's van
in return for their cancelling last month's newspaper bill.
If both businesses involved in the transaction are registered for VAT, you must both account for VAT on each separate supply you make to each other. You have to do this even if no money changes hands, or if you pay only a net amount after setting off one outstanding balance against the other.
HMRC will expect to see sales and purchase orders and shipping information for each supply as well as the entries in your accounting records.
Like all other transactions, you'll need to check that you've got the tax point right. The date of the tax point depends on whether you issue an invoice or you just record the set-off in your accounting records.
- If you issue an invoice, the tax point is the date of the invoice and you must account for the VAT at that time.
- If you set off supplies or mutual debts by making an entry in your books to show that the amount is no longer outstanding, the tax point is when you make the entry. You must account for VAT at that time on the full amount of the supply.
Example
Company A and Company B supply each other with goods. The cost of the goods in both cases is £500 plus VAT. If they both issue invoices when they supply the goods, the invoices create the tax point and they must account for VAT in the normal way. If they later set off the amounts owed, no money will change hands but the set-off won't affect the VAT position, as the VAT should have already been accounted for.
If they set off the amounts they owe each other in their accounting records before they issue an invoice, the entry in the records creates the tax point. Neither pays anything to the other but they must both declare their output tax on their supply and reclaim the input tax on their purchase at the date when they made the entry.
Find out more about tax points and when payments are due
More useful links
VAT rates and charging and reclaiming VAT on sales and purchases
