Recharging costs onwards where no tax relief is given

[Mrbeancounter]

As an adviser on behalf of a client who incurs disallowed costs that he recharges on to the fianl client. He does a large amount of focus group and interviewing as his main trade, hence "entertainment" is necessary. However his contracts allow him to recharge all costs to his client, with supporting invoices. The (recharged) income would be taxed, but no tax relief on the expenditure, but no overall cost borne by him. Has anyone come across a provision to allow the "netting" of income and the cost? We also fear that with the supporting invoices, the end client will also disallow these costs again in their comps, hence be disallowed twice. Many thanks for any pointers on this...!

[JAB]

There will have to be a disallowance somewhere, otherwise it would be very easy for group companies to avoid disallowable expenditire by having it incurred originally in one company and then having it recharged to another. In practise, for a group situation the Revenue will let you choose where the add-back goes.

For your (non-group) situation, you should try to get the final payer to agree to putting the add-back through their comp., as the expense was incurred by your client (acting like a service company) on behalf of that final payer, so it makes more sense that it should be deductible for your client rather than the final payer (the Revenue would not expect there to be a double disallowance). You could persuade the payer to do this by saying that otherwise you'd have to gross up the re-charge for your client's lost tax relief.

[JAB]

PS my response above was for disallowable expenses generally. For entertaining expenses the specific exemption in s577(10) TA 88 may apply for your client.

[Mrbeancounter]

JAB - Thank you very much for that clear analysis and also the reference to that exemption. I will certainly raise that with my client, and where there is a large function, we will certainly have to clarify if the end client picks up the tax or not! Many thanks.