Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Replies to Queries -- 2 -- Thank you payment

27 June 2001
Issue: 3813 / Categories:

I have a client who is a consultant in the insurance business. His terms of engagement are a fee plus commission. In 1995, one of his overseas clients was taken over by another company that did not pay commission. As a result, my client did not receive payment of commission which was in the pipeline.

I have a client who is a consultant in the insurance business. His terms of engagement are a fee plus commission. In 1995, one of his overseas clients was taken over by another company that did not pay commission. As a result, my client did not receive payment of commission which was in the pipeline.

In January 2001, the chairman of the overseas client was in the United Kingdom and contacted my client. By way of a thank you for all the work that my client had undertaken for his company, he gave, from his own personal account, my client a cheque for $5,000.

I intend to make full disclosure of the above circumstances when completing my client's tax return, but would be obliged to know readers' comments regarding the taxable nature or otherwise of the $5,000 payment.

(Query T15,829) – Perplexed.

 

The facts are remarkably similar to those in Simpson v John Reynolds & Co (Insurances) Ltd [1975] STC 271, which 'Perplexed' would do well to read in full, if he has not already done so. It also related to the takeover of an insurance agent's customer and a resulting termination of a trading relationship, followed by the payment of a 'consolation' of £1,000 a year each year for five years. This was held by the Court of Appeal not to be a trading receipt:

'… when a payment is made purely voluntarily, on the termination of a trading relationship, that termination being so far as the parties can possibly foresee a permanent termination, and is made for no other reason than that the party making the payment is sorry that the relationship has had to terminate, and is grateful for the excellent service which the payee has given to it over a very long period of years, then it appears to me quite clear that the payment does not arise or accrue to the payee by reason of any trade carried on by it.'

The long break between the termination of the trading relationship and the receipt of the money, and the fact that the payment appears to have been made personally by an officer of the customer rather than the customer itself, are two differences – both of which tend to support the argument that the receipts are not trading receipts.

The main factor which might count against the client in this case is the comment that there was 'commission … in the pipeline'. If the payment related to services which had been rendered already, but had not been paid for, then the eventual reimbursement of a 'bad debt' might be a trading receipt, even if it came from an indirect source such as the chairman of the customer. But if this simply means that the consultant lost the opportunity to earn further profits because the relationship was terminated, John Reynolds should apply.

Note that the accounting treatment should not be relevant, although it will no doubt highlight the matter to the Revenue if the receipt is included in the accounts and then adjusted out. In John Reynolds, the 'consolation' was included in the profit and loss account but it was not in principle a trading receipt, and the accounting treatment could not change that. – Leyborne.

 

We need to consider whether the voluntary payment made to the insurance consultant is to be included as a trading receipt in his business accounts. It appears from the facts provided that this is not the case, as ordinary commercial principles do not require the inclusion of this sort of voluntary payment which has been made, not in respect of any services provided by the insurance business, but as a recognition of past services.

It is the nature of the payment in the recipient's hands which determines whether it is a receipt of trade, the motive of the overseas client being relevant only to the extent, if at all, to which it has any bearing on the nature, or character, of the receipt.

The intentions of the payer need not be considered, but attention should be focused on whether the payment was earned by the client on actual work carried out by him. It would appear that the answer is no, in so far as the $5,000 was definitely not solicited for!

In this case it appears that the $5,000 received will not be chargeable to tax as a trading receipt and there will be no harm done in the making of a full disclosure of the circumstances on the client's tax return. – Goldstone.

Extract from reply by 'Lane':

In a self-assessment situation, the client either volunteers a tax liability (unlikely to be challenged on enquiry) or risks interest. What evidence might help to avert penalties? If a Schedule D taxpayer, the cheque should have been cleared privately. A memorandum should be recorded of the time and place of meeting and the identity of the payer and his bank account. A letter could be obtained explaining the donor's motives. The six-year interval between loss of the commission and receipt of the gift may be thought to provide sufficient justification for treating the matter as private beyond a doubt, without useless disclosure.

Issue: 3813 / Categories:
back to top icon