Karen Sayers
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Entertaining costs recharged to clients

Entertaining costs recharged to clients

My client pays for a lot of entertaining and gifts on behalf of a customer. These costs are recharged to the customer. Am I right in thinking that the reimbursed expenses (ie entertaining recharged) is income of the company but the costs of entertaining are disallowable in the tax computation. This means that my client loses out by 20% of the costs. (The client is a limited company)

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By BKD
25th Feb 2013 20:22

No

If they're re-charged they're deductible.

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26th Feb 2013 09:50

But surely......

............ only if these fees and entertaining costs can be said to have been incurred by the client as agent for the customer.

Or are you saying that because the client is not actually entertaining his own customers but those of his customer, that they are allowable?

Rather an interesting query!

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By BKD
26th Feb 2013 10:23

The words that I read were ...

... "on behalf of" and "recharged". Assuming that the words have been used correctly, I'm happy with my advice. If they're genuine re-charges an alternative (and in my view, acceptable) treatment would be to net income and expenditure - same result. 

A further alternative is to disallow the entertaining in full, but not to tax the re-charge. A number of our clients do this, the treatment is fully disclosed, and HMRC have yet to take issue with it (that's not to say that they won't at some point in the future, but given that at least one such client has had a full enquiry without the matter being raised I'm relatively comfortable).

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26th Feb 2013 10:35

Agree with BKD

In this case, the 'entertaining' isn't entertaining for Karen's client from a tax point of view. Karen's client is being paid to provide a service of entertaining the customer's customers. Any costs incurred are wholly and exclusively incurred and so are tax-deductible for Karen's client.

The amount paid to Karen's client by the customer is 'entertaining' from the customer's point of view and would not be tax-deductible for them. It is similar to paying a specialist events organiser to provide hospitality to your customers. Whatever that organiser pays out to provide the hospitality is deductible for them as it is part of their normal business and isn't to do with entertaining their own customers.

Cathy

[email protected]

 

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26th Feb 2013 10:59

I don't necessarily agree with BKD

It depends on the circumstances. For the entertaining expenditure to be allowable, there must be a contractual obligation to provide the entertaining, or it needs to be provided as agent.

When Karen says that she is reimbursed for the entertaining, does she mean that she charges a price to her customer that takes account of the expenses (including entertaining) that she has provided or will provide.  Or does she has a contractual obligation to provided the entertaining for which she is then reimbursed.

In the former case, the entertaining is disallowable,in my opinion.

You're contrasting BIM45013 with the position in the Evita Case (Entertainment Group of Companies Ltd VTD 16639). See under the heading "Luvvies party" (about 2/3rds of the way down the page) in this Taxation article.

Whilst Evita was a VAT case, the direct tax legislation and the VAT Statutory Instrument are pretty much identical in their definition of business entertainment.

I'm sorry, but your suggestion of not taxing the recharge where the entertaining is disallowed sounds nonsensical. Either Karen's client acts as agent, or has a contractual obligation to provide the entertaining, or it's the client's entertaining and they are charging a price based on the costs that they incur.

In the latter case, the entertainment is the client's business entertainment, which is disallowable, and the full amount charged to the customer is taxable income.

I think BKD's initial response, as well as Cathy's are based on the premise that there is a contractual arrangement.  I find though that people do say they've recharged the expenditure when they actually mean that they've charged a price that takes account of the costs that they've incurred as principal, and Evita applies in those situations.  Still love you Madge.

Just picking up the VAT side, if it's allowable expenditure then you can recover the VAT.  If it's disallowable you can't, unless it's an overseas customer (but you might then need to account for output VAT).

The logic applies in exactly the same way to gifts, as it does entertainment.

Incidentally, I see a similar point has come up before and I said the same thing.  Doesn't make me right; but it does make me consistent!

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By BKD
26th Feb 2013 11:19

Nonsensical or not ...

... HMRC appear to accept the treatment. (I understand that HMRC's acceptance should not be taken as confirmation of the correctness).

I find though that people do say they've recharged the expenditure when they actually mean that they've charged a price that takes account of the costs that they've incurred as principal

I've no argument with that - but I was making the assumption (there we go again) that when the OP said 'recharged' she in fact meant 'recharged'.

To explain my own clients' position, they regularly host joint functions with their customers and the customers agree to pick up the tab for their part of the do. For convenience, our client meets the full cost and re-charges that part attributable to the customer. Whether we disallow the expenditure and income, or allow both sides, I'm quite relaxed about the the treatment as are, importantly, HMRC.

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26th Feb 2013 11:38

No, no, no...

... that's not a recharge. That's a contribution from the co-host!  I'd agree that your disallowable business entertainment is the expense incurred less the contribution received.

In the context of Karen's query, I suppose I'm just suspicious of the word recharge.  From a VAT perspective, Evita failed because the entertaiment was provided to the attendees, rather than there being an onward supply of a launch party to the end client, which could have been achieved with minor alteration to the contract.

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26th Feb 2013 11:42

thanks

Thank you for all the comments - looks like I need to find out what i mean by recharge!! I can see that it will make a difference. wrt the VAT we are flat rate scheme so hopefully no problem.

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26th Feb 2013 12:05

Flat Rate ?

I think flat rate might make a big difference.   You need to check who is buying what from whom.  To whom are the invoices addressed ?

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