The legality of barter?

DeVore

Something I have kicked around in my head for a while and wondered the legality of it.

Suppose there are three people. An IT guy, a plumber and a graphic designer. They agree a variable "cost" in their respective trades in terms of "favours". So, the IT guy will fix your computer but wants 2 "favours" in return. The Plumber will come out and fix your tap for 2 favours (or three favours if its at night) and the artist will do you a logo for one "favour".

They keep track of the "favours owed" by exchanging "tokens". The idea is obvious enough especially when its expanded to a large number of people.

If the number is large enough, it starts becoming an effective *currency* no? This is where my questions begin...

Isn't this avoiding the currency system and thus the tax system?

If they agreed a "real world value" of the favour-tokens as being extremely small (say .00001 Euro) does that make a difference?

Is there an inherent illegality in this kind of thing?

DeV.

Hobart

From what you are describing, there is no illegality involved as such, but there are inherent issues around taxation and also valuation of trade. You are talking about a contra deal (or that's how I know it) and the first thing to think about is VAT. Most inter company exchanges involve VAT. You cannot, on the one hand, charge out your service and/or product at a rate inclusive of VAT, and then on the other, swap your service for a dozen apples, without the Revenue getting involved. While VAT is a legitimate claimable expense, the Revenue is the Net gainer in all VAT transactions, whether the payee is the manufacturer or the end user.

The second issue you have to address (and this has less of a legal slant) is the valuation of your time and/or product. What if you were to perform 1 hours work for your local butcher, and yet you would expect him to do 3 hours work in return for you? How would that work. What if you are a manufacturer of products? How do you price your product in the event of a trade? Do you price it in terms of what you would get on the open market or do you price it at how much it cost you to manufacture?

So two things to bear in mind, VAT and pricing.

Duffman

Nothing illegal about the arrangement itself. When it comes to accounting for all this for tax purposes, however, anti-avoidance mechanisms kick in whether this ends up under the income tax or capital gains regime.

Revenue would most likely attribute market value to the services in question. You're free to value the favours in any way you want but you will probably be taxed as if all this was happening at market rates. Benefits in kind are taxed as income and if you sell as asset (like the tokens in this scenario) at an undervalue, you can be taxed as if it was sold at market price.

It really depends on the scale of all this though. You could happily do quite a lot and remain within tax free allowances. It's only going to become complicated if you make a living from it. As for VAT, there are minimum thresholds so you wouldn't necessarily have to register for VAT straight away.

gerry87

You're talking about a Local Economic Trading Scheme (LETS). There's a few of them around.

As said above, nothing illegal about it. Tax isn't a huge issue, it must be paid the same as if each person hired and paid the other, no differences.

The issue of valuation of service can really be down to the individual companies, if someone really wants some painting done, they may be willing to throw some accountancy hours towards it, irregardless of relative value (people themselves often don't value their services at market value).

However, it's a pretty big undertaking to organise, it's the reason that many of these systems fail. You would have to actively manage inflation in the system.

How are the credits distributed? X amount when you join?
How many credits should there be?
Whats to stop you printing credits whenever you want?
If people join and leave, are credits taken out of the system?

I'm working on something similar, the site in my sig... shouldn't really be advising potential competitors!