Quid Pro Quo
“The exchange services and goods for services and goods in return.”
Quid pro quo is a very interesting part of accounting; we see it happen and we get asked about it, but what’s the stance on it from a tax perspective?
For example, let’s say you’re a plumber, your mate Dave is extending his house and wants to put in an en-suite. Since you’ve been buddies for years, he offers to do it for ‘swappsies’. He owns an appliance store and will give you a beer fridge and microwave for your man cave in the garage, with the balance owing paid in cash. He shows you his carefully sketched plan on the back of a napkin and you estimate that it’s a reasonable swap.
After a couple of days you get to thinking about the arrangement while sending out invoices for the week. So what does your accountant say? There is nothing wrong with quid pro quo as long as you show it within your books. Looking at the broader picture, if you take on quid pro quo jobs, then your earnings will go down. No doubt you’ll purchase the plumbing supplies through the company because it’s cheaper, so expenses are not reduced. This is tax fraud in the eyes of IRD, so here’s how you account for it without getting into hot water!
- You invoice Dave for the $1,500 + GST that the job would normally be charged out at (standard rates)
- Dave gives you an invoice for the bar fridge $900 + GST plus microwave $250 + GST (normal rates)
- The difference of $350 is paid against invoice
- Both invoices are then off-set against each other in your books and Dave’s
This means your sales are not reduced, so you aren’t understating your income. In the yearly Profit and Loss your income remains the same and the GST will nett off against the income and expense.
So why is this important?
Understating your sales figures, even if it’s only a small amount, can get you in trouble. If you try to get a bank loan, your figures won’t reflect your true income and if tax inspectors come knocking at your door and see a garage full of toys when your income is very low, there will be a serious issue!
So take the advice of a bean-counter and do that extra bit of paperwork to keep that sweet-as deal sweet as!