Must I pay tax on bartered services?

How are individuals taxed on barter “earnings”? I do some self-employed work for a company in return for free desk space. I am also considering doing a deal with a self-employed tradesman whereby I tutor his children in return for work he is doing on my house. No money would change hands and the arrangement would be informally agreed. Are we under an obligation to report such deals for tax purposes?

Tim Gregory, partner in the private wealth group at accountants Saffery Champness, says that you should be reporting all taxable income, although the nature of barter transactions may mean that there is no tax to pay.

Where you are performing self-employed work for your client company, both you and the company should be reporting the value of the notional income on your tax returns. However, as the rent that you are avoiding paying would otherwise be tax-deductible, you can also claim a full tax deduction for that notional rent. The net effect would be no increase to your profits and so no additional tax nor National Insurance liabilities.

Similarly, the company will be engaging your services for its business, so it could also claim a tax deduction for amounts that it is notionally paying you, with the same net result.

Hence you are each getting what you want without paying tax on the income. However, if the deal is negotiated on competitive terms, you would have the same result even if you were paying each other in cash.

The proposed arrangements with the self-employed tradesman are slightly different. He cannot claim a tax deduction against his business income for the education of his children. Similarly, you cannot claim a tax deduction for work that he does to your private house (except to the extent that there might be a business use of the house).

In this case, the tradesman is doing his normal job – and so should be reporting the value of the work he is doing on your house on his tax return. The value of the work is the amount that he would charge any customer for the same work. This would form part of his taxable income.

Your position might be different. You need to consider if the tutoring that you intend to provide is part of your self-employed business or not.

If it is similar in nature to the self-employed work that you normally provide, or if you provide tutoring to other people, or if this tutoring is going to continue for a long period, then the tutoring would be considered to be business income for you and therefore taxable. The amount of income would be the same as you would charge any other client for the same work.

But if the tutoring income is not business income for you, then all you are doing is providing a favour for someone – in which case it is not taxable.

This type of transaction will often come up in schemes known as Local Exchange Trading Systems (LETS), where people in a community help each other by, for example, cutting someone’s lawn for credits that can be “spent” on having someone come and cut your hair. Where these services are provided by someone in business, the value of the services would represent taxable income on which tax should be paid. But if the service provision is not by way of business or trade, then there is no requirement to declare such credits on a tax return.

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