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Recharging non-allowable cost

Recharging non-allowable cost

I have a client who frequently recharges costs incurred back to his clients and at times this includes non-allowable items. For instance he may be asked to entertain a sales prospect.
If we show this as separate income and expense entries then the expense should be disallowed hence creating a tax charge on a neutral transaction. But I am concerned that netting off would not be correct.
Can anyone advise the proper treatment.
Gerry Sims


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By Anonymous
02nd Feb 2009 16:59

Surely Euan's method will result in the income being taxed when it shouldn't be.

Fees £100+ Exs £20= Income £120
Less Expenses £20.
Net income £100.
Add back on comp £20 =£120 taxed.

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02nd Feb 2009 14:13

Don't net off
The total amount charged to customers, including recharged expenses, should be posted to Sales and have VAT added (or count towards the registration threshold if not yet registered). It is all part of your client's turnover because it is what he has agreed with his customers that he will charge them. It does not matter if it is comprised of different bits of labour, travel and entertaining expenditure - it is the total that counts.

It follows that the recharged entertainment should be disallowed in the client's tax computation. It is non-deductible expenditure that your client has incurred for the purpose of his business.

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By pawncob
02nd Feb 2009 12:38

Lunch anyone?
If you run this through a "disbursements" account then it will net off and only the deductible items will remain for the P&L.
Alternatively, don't disallow the expenditure in the comp.

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