“Cashbacks” and trade-ins are not the same thing for VAT, as Rob McCann of the VAT People explains.
It is quite common for businesses to exchange goods or services with each other. This is sometimes an exchange of goods or services with a like for like value, or sometimes payment is made for a supply by part cash payment and part reciprocal services/goods. It is equally common for the same businesses to assume that there are no VAT consequences for such an arrangement as there is no money changing hands, however, this is not usually the case. This is highlighted by the recent case of AV Concepts, which involved a supply of goods in return for a cash payment and obsolete goods. The hearing should have been a fairly simple case involving a dispute with HMRC about VAT of only just over £1,000, however it looked at some complex issues relating to how the value of a supply is determined when a barter transaction occurs.
The business supplied technically advanced white boards to schools, which teachers could write on and print off notes for the pupils. The boards were almost invariably supplied to the schools in return for cash and obsolete projectors or other equipment. HMRC allow a discounted amount to be used where a fixed allowance is offered, where amongst other points, no attempt is made to value the traded-in goods and there is no reason for the goods to be accepted other than for trade promotion (which would not apply where prior arrangements have been made for the traded-in goods to be reconditioned or sold). The business had sought to rely on this policy, however, the discounts it offered were not fixed amounts and the obsolete equipment was subsequently serviced and sold on eBay. In addition, the new equipment was not actually sold to the schools but sold to a lease business BNP Paribas who then leased it to the school and it was not clear if any schools had actually paid the business cash for the supply.
The dispute with HMRC related to establishing the value of the supply by AV Concepts, that is :
- were the white boards supplied for cash and barter goods (the obsolete equipment) that AV Concepts might later sell? If so VAT would be due on the total cash and barter goods value, or
- if the obsolete item had no value and the business was offering a discount on the sale price of the white board, would the VAT be due on the cash payment received?
The chairman ruled that the value of the supply was established by the contract price of the item supplied by AV Concepts. This meant that if the sales price had been £100 and it was reduced to £90 when items were taken in part exchange, the non monetary value of the part exchange items was £10. VAT therefore should have been paid on the total of the cash element of the consideration and the value of the part-exchange item. VAT would therefore be due on the £100 total consideration received by AV Concepts.
The VAT People’s Rob McCann commented, “The well-known Elida Gibbs case [Elida Gibbs Ltd v C & E Commissioners] demonstrated that retailers may reduce their VAT when “cashback” discounts are offered, however in this case the tribunal was satisfied that this was not a discount, but a combined sale for cash and goods for value – and as such, the business was required to account for VAT on both the cash consideration and the goods received in exchange.”