You’ve agreed with one of your suppliers that you’ll provide your firm’s services at a low rate in exchange for buying their products at cost. HMRC has told you that you and the supplier must account for VAT at the full market value of the goods and services. Is this correct?
The price is right
Normally it’s up to you to decide what price to set for your supplies of goods or services. Your decision will be a commercial one and you’ll only discount your prices where it’s good for business. HMRC is therefore happy for VAT to apply to the price you charge, even if it results in a loss. But it’s a different matter where you enter into a barter trade with a customer.
HMRC’s expectations
HMRC expects an open market price to be charged for goods and services.
Example 1. Acom Ltd allows other businesses to advertise on its website for no fee in the hope this will increase traffic and increase its own sales. HMRC might argue that the cost of providing the website space has greater value than that achieved from the increased website traffic. HMRC expects Acom to account for VAT on the open market value of allowing space on its website to advertisers.
Example 2. Acom Ltd, a wholesaler, supplies goods to Bcom Ltd, an associated retail business, at a discount compared with any other business it supplies. HMRC will argue that Acom should account for VAT as if it had charged Bcom its normal price for the goods.
HMRC’s powers
HMRC can impose open market value on some transactions, but its powers are actually quite limited. However, it often tries to intimidate businesses into charging open market value even when it doesn’t have the right to.
When can HMRC use this power?
The rules allow HMRC to impose open market value in cases where there’s tax avoidance and where there’s an actual loss of VAT. Open market value can be enforced only if:
- the value of the supply is at less than the open market value
- the two businesses are connected; and
- when the business purchasing the goods or services is not entitled to recover all of its VAT.
Example. Acom is an insurance business that only makes exempt supplies and so can’t recover VAT on purchases. It wants new specialist software which will cost £750,000 plus VAT of £150,000. Bcom looks after property and other overhead services for Acom, and is a subsidiary of it. It is VAT registered. It buys the software, recovers the VAT and charges Acom £100,000 plus VAT of £20,000. Acom saves £130,000 of VAT. All three conditions above are met and HMRC can demand VAT on the open market value of £750,000.
Tip. Don’t be bullied by HMRC. It can’t impose open market value on a transaction just because the payment you receive isn’t wholly in money; for example, in the case of barter transactions. The valuation in a barter is a commercial decision decided between the parties and so there’s not much HMRC can argue about.
When can’t HMRC use this power?
If you trade with an unconnected third party, you can charge what you like and HMRC can’t override it. Even if the transaction is with a connected party, if it’s entitled to reclaim all VAT on purchases, HMRC has no power to apply open market value.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.