Introduction
On 28 April 2025, the Federal Tax Authority (“FTA”) issued Public Clarification VATP042 (“Clarification”) to provide guidance on the VAT treatment of barter transactions in the UAE. As with all FTA Public Clarifications, it reaffirms existing VAT principles rather than introducing new concepts. This document focuses particularly on the valuation challenges that arise in barter transactions. Despite being a clarification, the document highlights key compliance and risk management issues for businesses.
This article unpacks VATP042 and explains its practical impact on business operations.
Understanding Barter Transactions: Two Separate Supplies
The Clarification reiterates a core VAT principle: barter transactions involve at least two independent supplies.
Each supply must be assessed separately under VAT rules. Unlike typical contracts where consideration appears as a single transaction, barter involves mutual exchanges that require independent VAT treatment for each side.
This distinction is crucial. If one party overlooks their obligation to issue a tax invoice or fails to value their supply correctly, it can result in incorrect VAT reporting.
Valuing Non-Monetary Consideration: Practical Issues
Determining the value of non-monetary consideration presents significant challenges. The Clarification outlines three approaches for valuing such supplies:
- Actual Market Value
Based on comparable transactions between unconnected parties. - Hypothetical Market Value
Used when no real comparable exists but an estimate is possible. - Replacement Cost Approach
Applied only when other methods are not viable.
These methods require careful documentation. Supplies like creative services, consultancy, or media exposure are often hard to value due to their subjective or unique nature. Businesses should retain market data, price quotations, or internal benchmarks to justify their VAT treatment during an audit.
While the Clarification does not define “monetary” consideration, businesses must assess whether their form of payment qualifies under UAE VAT law. Misclassification can affect the applicable VAT obligations.
Mixed Consideration: When Cash and Non-Cash Are Combined
Some transactions involve both monetary and non-monetary elements. In these cases, VAT must be calculated on the full value — including the cash and the fair market value of the non-cash portion (excluding VAT).
Businesses must avoid common errors:
- Declaring VAT only on the cash amount
- Ignoring the value of non-monetary supplies
These issues often occur in industries such as real estate or professional services. Proper valuation of both components is essential to avoid underreporting VAT.
Issuing Tax Invoices: A Dual Responsibility
The Clarification also makes clear that each party must issue a tax invoice for their supply.
Even if the transaction is fully non-monetary, VAT-registered businesses on both sides are required to raise valid tax invoices. This ensures transparency and proper accounting of output tax.
Businesses should update contracts and internal systems to reflect this requirement. They should also include provisions for sharing supporting documentation that validates the agreed values.
Audit Risk and Compliance Tips
Barter transactions often attract extra scrutiny from the FTA. Common errors include:
- Undervaluing supplies
- Failing to issue tax invoices
- Incorrect treatment of input VAT
To reduce exposure, businesses should:
- Keep documentation justifying market values
- Train teams on barter-related VAT rules
- Include VAT clauses in contracts that specify valuation and invoice obligations
These practices reduce the likelihood of disputes and penalties during audits.
Conclusion
Although VATP042 does not change the law, it serves as a strong reminder that barter deals require serious attention. Businesses must treat barter as rigorously as monetary transactions — from valuation to invoicing and recordkeeping.
By following the guidance in this Clarification, companies can minimize risk, maintain compliance, and prepare effectively for FTA reviews.
Prepared by Mohamed El Baghdady (Partner, Head of Tax and Financial Crimes), Marwan Alnooryani (Senior Tax Associate), and Ameena Al Jasmi (Trainee Lawyer) at Habib Al Mulla & Partners Law Firm.
Seek Legal Counsel
Our expertise in tax law and regulations allows us to provide clients with effective and accurate tax advice, taking into consideration their unique circumstances and needs.
Our tax and financial crimes team, led by our Head of Tax and Financial Crimes, Mohamed El Baghdady, has successfully advised and represented clients across various industries, including, but not limited to, consumer goods and retail, services, real estate, oil & gas and banking and finance, before the Government authorities, tax tribunals and courts. Our clients have been successful in multiple tax disputes before the committees and courts.
For further information, please contact, Mohamed El Baghdady, Partner, Head of Tax and Financial Crimes, on mohamed.elbaghdady@habibalmulla.com.
Disclaimer
The content provided in this article is intended for informational purposes only and does not constitute legal advice. While every effort has been made to ensure the accuracy and completeness of this information, the article does not offer a guarantee or warranty regarding its content. The matters discussed in this article are subject to interpretation, and legal outcomes may vary based on specific facts and circumstances. We recommend that readers seek individual legal counsel before making any decisions based on the information provided. If you require specific legal advice, please contact us directly.
