Bartering, the ancient and original form of trading used before the introduction of legal tender, allows parties to dispense with cash but still be able to acquire the goods and services they require. Tough economic times across the globe have seen an increase in trading by bartering. Bartering is making a comeback!
Bartering consists of the reciprocal exchange of goods and services – money does not change hands but each party must have something the other party wants. Bartering could:
- include companies who have a limited cash flow but access to goods and services they can supply; and
- be used in countries with an unstable currency or in difficult economic situations.
A bartering transaction may also involve payment by other means for example, payment by vouchers, or the use of a cryptocurrency like Bitcoin, or even airline air-miles. Bartering is an arrangement that two parties often come to naturally because of wants and needs.
It is preferable that a bartering arrangement should be detailed in a written agreement which records:
- the value of the goods being exchanged – the exchange should be such that each party is satisfied with the deal but sometimes it is difficult to measure the value of the barter and so the ascribed values must be agreed;
- specified details as to the goods and service being exchanged;
- what happens if one party fails to perform, especially in the case of services being provided;
- if an ongoing arrangement, an end date so both parties know when their obligations end,
along with the standard provisions of a service agreement or a sale of goods agreement.
Parties involved in bartering may need to report such arrangements as income in the tax year in which the goods or services are received. It may be possible to deduct expenses incurred in supplying the services or goods that are bartered.
Value-added tax (VAT) is payable on the acquisition of goods and services and any VAT registered vendor engaging in bartering must levy an invoice for VAT on the ascribed value of the goods and services being supplied. In addition, a cash value equivalent of goods being bartered may need to be ascertained for the purposes of recording the realisation value of such goods for the disposer and the take-on value of such goods for the recipient in order to calculate any applicable capital gains tax liabilities.
Some parties who get the bartering bug join bartering networks, online bartering sites or exchanges, which connect people who wish to engage in this form of trade and widen the scope of opportunities for bartering. Some networks or exchanges have adopted an alternative “currency”, vouchers or other payment systems. For example, the offeror can earn points or credits which can in turn be exchanged for another set of goods or services, sometimes known as “talents”, from other participants. By using a network or exchange, participants can access the goods and services they want, without having to find a counterparty with requirements that reciprocate their own requirements measure-for-measure.
So while bartering may be making a comeback, the more sophisticated and prevalent it becomes, and as the participants endeavour to overcome bartering’s limitations, the more bartering begins to emulate a monetary-exchange system.