Kendal's Local Exchange and Trading Scheme.

This information was provided by Letslink UK.

Tax Briefing, LETS in Britain.

This briefing incorporates some minor textual amendments from the Inland Revenue, who checked the previous draft. Every effort has been made to ensure its accuracy. However it is meant only to act as a guideline, not to replace advice from appropriate experts or the local Inland Revenue Officers. In Lets the principles are that everyone is responsible for their own tax, and that everyone is expected to act with responsibility and integrity in making tax declarations. This is essential to maintain a good reputation for Lets as a whole. If you are trading commercially through Lets do ensure that you liase with your accountant. If you have any local experiences of note, please do feed back as soon as possible, in writing, to Letslink UK.

POSITION

• If an exchange is clearly of a commercial nature, then tax will be liable in the normal way.
• If an exchange is not commercial, there will be no tax liability.
• Tax liabilities will be paid in sterling.

(It is most convenient for both taxpayers and tax assessors if the value of the local unit can be taken as equivalent to the pound sterling. Summaries of LETS transactions will be included in the appropriate Profit and Loss statement prepared for the Inland Revenue. These summaries will be shown in the accounts in the normal way, with notes to the accounts indicating their source).

• Under the standard LETS members agreement, individual members are responsible for their own tax affairs. Systems administrators, through LETSLINK, should provide advice on tax in general terms (by circulating this briefing, and any updates or news, to members). But it remains the responsibility of the individual to clarify any uncertainties
about their own case with an accountant, or an Inland Revenue officer.
LETS systems themselves are not-for~profit associations and as such should not be liable to tax. (This will depend on the the details of the system, and the organisers should seek the advice of their local tax officers.)

DISTINCTIONS

Distinctions are made between these types of trade:

Commercial exchanges, where you are self-employed and offering something connected with your normal business. These are liable for tax.
Exchanges where you are offering something which is not~connected with your normal business, but which is offered and supplied regularly so as to amount to a business in itself, and is therefore also commercial. These are also tax liable.
Isolated or fairly infrequent exchanges where typically you are doing a favour for a friend.

A key element for tax purposes is the amount of turnover in any particular line of trade.

Commercial exchanges play their part in strengthening the system and revitalising all parts of the local economy. The position here is simple: tax may be liable and should be paid according to existing legislation.

The above principles were agreed by the Inland Revenue and by the Treasury in letters from Stephen Dorrell dated 29/10/92 and 19/4/93.

EXCHANGE & MART

If you are not using LETS for transactions connected with your normal trade or business, then it is unlikely that you will be liable for tax. An Inland Revenue spokesperson has said that tax is liable when income is:

Regular,and
Can be defined as coming from a business.

LETSystems are primarily about community development, education and training. Within our communities we can apply a basic guideline; if you're just doing a favour for a friend, it's not taxable.

You will enter a grey area when your trade on the system builds up until you are supplying similar goods or services on a regular basis. Until it is clear that you are carrying out a trade or profession through LETS, I would use the following arguments:

We are all members of a local club where trading with each other is a hobby or pastime.
Our activities are basically training and skills share and until we become more proficient we will not be able to trade in the outside economy.
We operate on the same lines as a baby-sitting circle; credits gained on baby-sitting circles are not taxed.
If I made the same sales through the local paper, Exchange and Mart or at a car boot sale, I would not have to pay tax.

LETS & BUSINESS - SUMMARY

For tax purposes, LETS credits are treated as money. A LETS transaction has a value in pounds sterling and is taxable in the normal way. A business keeps an extra column in its accounts to record LETS credits, which are then treated as if they were sterling. Taxable profits are computed in the usual manner, as is VAT.

All taxes are paid in sterling. Businesses will almost always require a sterling component when using LETS. Set the sterling component to include an estimate of tax liability (and the normal VAT charge, if any).

Since all the normal rules apply, business expenses paid through LETS are tax deductible.

Tax is paid only on profits.

Charitable gifts can be tax exempt.

Drawings will give rise to income tax on the part of the proprietor. (But the cash paid out as tax can be viewed as a small outlay compared to the purchasing power of the LETS credits drawn out and spent in the local economy).

The principle has been agreed by the Treasury (see letters from Stephen Dorrell dated 29/10/92 and 19/4193).

The Inland Revenue and I~ Customs and Excise are familiar with the process, which is already established through the commercial countertrade networks now operating within the UK. Unlike commercial systems, however, LETS are community development oriented, locally based and non-profitmaking.

PROBLEMS WITH 'BARTER'

Exchanges which are recorded on a LETSystem are not barter. Barter opens up a legislative can of worms. Much effort is saved by avoiding the legal analysis of barter. It is sufficient to say that:

Barter means that the requester must pay something back to the offerer. With LETS this is not so. The commitment is to the membership as a whole, not to any one person. You can make a commitment on LETS with no thought of when or where you will balance it.
When LETS trades assign a value to an exchange, measured in pounds sterling, the result is a contract between two parties which is freely entered into. This contract should not be subject to any valuation by outside authorities. If I want to charge you less than the "going rate" and you accept, that's our decision. We should not have to conform to any requirements for notional valuation.

NOTIONAL VALUES

If the monetary value of a transaction is not clear, the authorities can put a sterling value on it according to their standard tables of going rates. This is often called a "notional value". When assessing notional values, they need not pay any attention to the LETS value of the transaction. In the same way, they may ignore the local exchange rate. (The number of LETS to the pound sterling need not come into it)

If excessively low values are assigned to Lets trades (eg charging 1 Lets for what would normally be £10 worth), tax officers may well become suspicious. Where prices are low on Lets, it may be as well to clarify the social aims of LETS and explain that many trades are not purely commercial.

LETS & INCOME TAX

In theory, most exchanges are taxable. This includes barter (tax may still be liable even if no money changes hands).

In theory, if I sell my bicycle, I am liable for tax. But there are two important points that will affect the tax that I will end up paying:

Do I make a habit of selling bicycles for profit? If I don't, then the Inland Revenue are unlikely to be interested. If I do, then I an engaged in the trade of bicycle selling, which is a different matter.
Have I made a profit? I am only liable for tax on my profits.

If I am engaged in a trade or profession, the Revenue are interested. They will want me to inform them that I am trading and they will want to know what my profits are.

My status with the revenue is not affected by the amount of time I spend trading. I could have a full-time job at County Hall and still be a self-employed bicycle trader working evening and weekends. The Revenue will then want to know about my activities as a bicycle seller.

We now have a taxpayers' charter, which enshrines the basic principle that no-one should pay more tax than they need to. Inland Revenue offices are usually helpful, but in the end it's up to each individual to make his or her own case for minimising tax payments, getting help from someone more experienced if necessary.

This is the process of tax avoidance, which is legal, On the other hand, false declarations, secret slush funds and other forms of cheating are tax evasion, which can get you into trouble.

LETS & COMMERCIAL TRADE

If your annual turnover as a self~employed person ("sole trader") is greater than £15,000 the Revenue will require a full set of accounts from you. If your turnover is less than this limit, they will want a brief profits statement.

Remember that tax is based on your profits. In any tax year, if you balance sales made in LETS credits with allowable expenses paid in LETS, you can avoid tax on LETS profits, because you won't have any profits. You can carry forward losses in previous years to offset profits in later ones.

If you undergo relevant training, that is an allowable expense.

National Insurance liability only comes into force above the small National Insurance exemption limit currently £3,140 net profit.

SUBMITTING TAX ACCOUNTS

Prepare clear accounts of LETS transactions, in exactly the same form as you prepare your normal accounts. Incorporate the sterling equivalent in any profit and loss statements you prepare for the Revenue. (Try to get a good accountant on the LETS system).

Avoid taking drawings from your LETS business account for your personal use. (Or if you do take drawings, prepare to pay tax on them). Set up a personal LETS account for your non business transactions.

Tax will have to be paid in sterling. If you think you are going to be liable, collect some sterling from your trades to cover tax.

EMPLOYMENT TAX

Employer's National Insurance payments and PAYE are likely to be linked to the full sterling value of any wages paid.

It may help to "contract out&q as many services as possible to self~employed people on the system. Give people an order or letter of contract specifying a finite amount of work to be done, with a lump sum price. But watch the "rules of thumb" used by the Revenue to assess whether anyone is employed or self employed: contact the address below for more details.

Any LETS credits given to employees are best given in the form of a bonus, not as a regular payment. Non-regular "payment in kind" is not liable for National Insurance (see Revenue comments in Daily Telegraph article by Carol O'Leary 6/11193). Employees may still have to pay income tax - check with the Revenue.

VAT

If your turnover is greater than £45,000 per annum, charge VAT on your LETS transactions.

If you are already registered, it's not a big problem. You should accurately assess the full sterling value of the transaction. VAT must be calculated on this full sterling value and charged to the buyer in sterling as normal. The ex-VAT amount can be in any mix of LETS credits and sterling (you decide this with the buyer).

The VAT can then be included in your returns to Customs and Excise. (Don't wait for them to come looking for it, they have very clear rules for assessing VAT on "payments in kind" or barter. You must collect the VAT for them, or they'll have it from you anyway).

It's trickier where your turnover is less than the £45,000 registration limit, but the volume of LETS trading, when translated into sterling, takes you above that limit. You don't have to register for VAT if you think you are going to go above the limit within the next twelve months (registering in advance was previously the rule, but that's changed now). But you are obliged to register as soon as you go above the limit. There is a case for contacting your VAT office before this happens to sound them out about it.

LETS SYSTEM ADMINISTRATION

A few words on the legal structure of LETS systems is appropriate here. One legal freedom in Britain is freedom of association. To form an association, all we need to do is to get together and get on with it. If you do nothing about legal structures, you are considered to be an "unincorporated association".

Unlike the commercial "barter" networks, LETS operate on a not-for-profit basis and the administration is usually not liable to tax.

As soon as you feel ready, contact your local Inland Revenue office and ask them for advice about administration and tax. It's best to take the initiative before they hear about you. Make it clear from the start that you are not-for-profit (or the Revenue may suspect that you are one of the commercial barter organisations). Tax implications for LETS administration are likely to revolve around the following questions:

Are you trading with the general public? As long as we are merely keeping accounts and producing directories for a private network, there is no risk that we are trading with the public.
What income are you receiving and are there any profits made from it? Again if we restrict ourselves to the basics and are clear about our cost-of-service ethic, there should be no tax liability.
Is anyone receiving income from administration? Any payments made to administrators should be consistent with the work that they do. The individuals concerned may be liable to tax. As outlined above, if the rewards are occasional and obviously not a business activity, no personal tax should be liable. (When a significant amount of works builds up, it makes sense to share the work out, especially among people who don't earn enough to pay tax anyway).

DISCLOSURE

The Inland Revenue do have powers to inspect LETS accounts if they so wish. But, as with bank accounts, first they would have to obtain a court order to gain access to any individual account.

All accounts are private to the network, so any initial demands could be met with a polite refusal and reference to the standard LETS members agreement (which gives you no authority to release details outside the network). Say the LETS accounts are treated with the same confidentiality as bank accounts. Ask revenue officers what action they intend to take.
Refusals will probably raise suspicion, so it is a good idea for some individuals to agree to reveal their own accounts to show the type of activities undertaken and the scale of trading. (There's nothing like a detailed account of dog-walking and granny-sitting to convince an officer that further investigation is like to be less than cost-effective).
Commercial systems have to agree to provide a list of their account-holders to the Revenue. Everyone trading on LETS should be aware that in an extreme case their names and/or accounts could be accessed by the Revenue.