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Entertainment conundrum

My client is an expert in fighting computer fraud. He has his own company with 10 staff. In order to get new business, he entertains existing and potential clients lavishly. Many of these people are told by their employers not to accept entertainment to a value exceeding say £1000 per day. If they do, they must refund the excess to my client out of their own pockets. When they do this, my client never banks the cheque. It has been suggested that this income is taxable in the company. Is this correct? Are there any VAT angles?

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Never banking the cheques being key?

Couldn't you argue that since he isn't banking the cheques, your client is refusing to accept the payment?  In which case, there is no income for your client.  So it can't be taxable?

The income from the clients is not billed, or owed under any contractual terms between this client of yours and his clients.  There is no basis for recognising the income other than miscellaneous income - and then only if he accepts the payments?!

Would be interesting to hear any explanation to the contrary....

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The income should follow the expense?

Even if he did bank the cheques, the "income" as a contribution to an entertaining expense would have the same treatment as the expense (ie added back for tax purposes). 

If he is unable to claim VAT either he has not made any output supply, but received a gift / contribution towards his expenses.

I like the idea of being entertained at well over £1000 per day - maybe your client would like to sell me some anti fraud services...

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