7.6 Deduction of VAT in barter transactions

Example 1

Company A and Company B can both fully deduct input VAT.

Company A owns a good (A), which it wants to swap for another good (B), owned by Company B. The costs of Good A (excluding VAT) is 100. The cost of Good B is 150 (excluding VAT). The standard VAT rate, applicable to both supplies of goods, is 20%.

No cash payments will be made between Company A and Company B. Based on the above, Company A will have to remit VAT to the amount of 10 to the Tax Authorities, whereas Company B will have a VAT claim to the same amount. By bartering, the VAT positions of both companies towards the Tax Authorities change.

Under the current rules based on CJEU case law, if neither business advertises or agrees on a specific price or value for its supply, but just ‘trade’ the goods, Company A will have to remit a VAT amount of 20 to the Tax Authorities (20% of 100). Under the relevant VAT rules, Company B will have to issue an invoice for its supply, which Company A needs to be allowed VAT deduction (see Article 178(a) of the EU VAT Directive). That invoice will mention the taxable amount regarding the supply made by Company B, i.e. 150, and a VAT amount of 30 (20% of 150). Company A will be able to deduct that VAT amount of 30 from the VAT amount payable of 20, leaving an amount of 10 to be claimed from the Tax Authorities, assuming that the transaction values are settled by offsetting the amounts due with each other. The opposite applies to Company B, who will offset a VAT amount payable of 30 with a deductible amount of 20. The total net result for the tax authorities is zero.

If the businesses were to use the same taxable amount, say 125 (100 + 150 / 2), neither Company A nor Company B would have any amounts claimable or payable from or to the Tax Authorities. This in my view better reflects the economic reality of the transaction, where neither business makes a payment because it is assumed that under the barter transaction, equal values are traded.

Example 2

In the same example, if Company A would only have a general VAT deduction right of 50%, this would have the following effect:

Company A would have purchased good (A) for 120 and would have been able to deduct 50% of the input VAT amount of 20, i.e. 10. The VAT cost of this good (A) would be 10.

Subsequently, because good (A) would be use good (A) for a fully taxed supply (the supply to Company B), Company A would be able to deduct the remaining non-deducted VAT in full. Assuming that good (A) would not have been used for business purposes yet, the VAT cost of good (A) would then come to 0.

As a result of the barter with Company B (the swap of good (A) for good (B)), Company A would be in the possession of a new good (good (B)) with a value of 150 (excluding VAT) without having to make an additional payment. If Company A would have sold goods (A) for cash and would have purchased good (B) for cash as well, Company A would have had to pay 180 to Company B (150 + 20% VAT). Of the 30 VAT, 15 would have been deductible. The VAT cost of good (B) would have been 15, making the total cost of good (B) for Company A 165 (150 + 15).

However, Company A did not pay 150 (excluding VAT) for good (B), it bartered it for good (A) with no additional payment. Through its own ‘inner workings’, using its business skills, negotiating skills and power of persuasion, it was able to obtain a good (good (B)) with a higher value than good (A) at no additional cost. However, through this business transaction, value was added, and Company B, by performing this business transaction, was able to obtain or purchase more (good (B)) than it originally had (good (A)). The total cost of good (B) for Company A is 110 (including 10 non-deductible VAT) (and not 165).

In my view, this transaction (obtaining a business asset without a VAT cost by a business that cannot fully deduct VAT) should be subject to VAT under the same rationale4 that ensures taxation of the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the course of such business, where the VAT on such goods, had they been acquired from another taxable person, would not be wholly deductible5 and the supply by a taxable person of a service for the purposes of his business, where the VAT on such a service, were it supplied by another taxable person, would not be wholly deductible.6

Because, in the example, Company A and Company B barter the relevant goods without additional payment, economic reality would allow the assumption that both companies consider the transaction to be of (at least) the same value. Applying my suggestion to set the agreed amount ‘in the middle’ of the values of each good, the taxable amount for each supply would be 125 (excluding VAT). For Company A, this would mean that a VAT amount of 25 (20% of 125) would be due on the supply of good (A) to Company B, and that Company A would be able to deduct 50% of the VAT paid on the purchase of good (B), i.e. 12.5 (50% of 25). This would bring the total cost for Company A of good (B) to 112.5. This is 2.5 higher than the (original) cost of good (A), which I – as explained – consider justified under the working of the relevant VAT principles. In pictures:

Original purchase:

Barter as two separate transactions:

Barter using the ‘average’ cost as taxable amount and for VAT deduction: