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I have been unfortunate enough to have my pension fund with Equitable Life, but after transferring the fund to another broker, I was happy to receive part of the commission from my broker.
Perhaps you could enlighten me as to whether or not the commission received in connection with this transfer of pension is taxable.
(Query T16,130) - Fiasco.
I have been unfortunate enough to have my pension fund with Equitable Life, but after transferring the fund to another broker, I was happy to receive part of the commission from my broker.
Perhaps you could enlighten me as to whether or not the commission received in connection with this transfer of pension is taxable.
(Query T16,130) - Fiasco.
The taxation position of commission rebates used to be addressed by Inland Revenue Statement of Practice 5/95. This suggested that customers would be liable to a tax charge on commission rebates received in relation to their own policies. However, following a challenge of this view by the Association of British Insurers and others, the Revenue issued a press release on 19 October 1995, announcing that this was no longer its view. Statement of Practice 4/97 was then published, replacing SP5/95.
The broad effect of SP4/97 is to establish that, where the receipt of commission by a broker is taxable in his hands under Schedule D, Case I or II, commission 'passed on to a customer ... as an inducement to enter into a transaction is deductible if it is laid out wholly and exclusively for the purpose of the trade or profession' (paragraph 17).
The position of the customer is addressed by paragraph 20 of the Statement:
'A sum ... which is received by an ordinary retail customer as consideration for the purchase by the customer of goods or services should not be regarded as a taxable receipt'. Thus, from the bare facts given by 'Fiasco', and on the assumption that 'Fiasco' is 'an ordinary retail customer' (e.g. is neither the broker nor employed by the broker), it appears that the rebated commission may not be assessable, either in the hands of the broker or 'Fiasco', if it is rebated as part of a contract separate from the transfer.
However, a word of warning must be added. It is not difficult to imagine an abuse of this approach where, for example, it is desired to obtain tax-free benefits from a pension fund. A series of transfers and commission rebates would quickly result in a significant reduction in the pension fund, but would also produce an appreciable tax-free benefit for the customer. This has clearly been recognised by the Revenue as a danger, and paragraph 41 of the Statement says that 'the consequences of paying commission on transfers between tax-approved pension schemes may be different from those outlined if such payment is effectively a benefit not authorised by the rules of the pension scheme'. In the circumstances outlined, there would appear to be a very valid, non-tax reason for 'Fiasco' wishing to secure a transfer. Without such a reason, however, a commission rebate may have the effect of removing approval of the scheme. You have been warned!
A thorough read of not only SP4/97, but also the article in the February 1998 edition of the Inland Revenue's Tax Bulletin, is strongly recommended. - Widow's Mite.
I suspect that the first paragraph of the Inland Revenue's Statement of Practice SP4/97 gives the information that 'Fiasco' wants to hear, 'in particular it confirms that most customers are not liable to tax on commission, cashbacks and discounts'. This is assuming that the receipt is a one-off, for example because, other than the policy to which the commission relates, there is no continuing business relationship. If there were such a relationship, then the receipt of the commission could be taxable under Schedule D, Case I or II, Schedule E (or, more occasionally, Schedule D, Case VI).
The situation does sometimes occur where a commission arises in respect of a personal transaction, but this is not a 'one-off' receipt. As an example, this could be where an accountant who receives introductory commissions for insurance business in respect of clients, then receives a commission for an insurance policy taken out on his own life. Strictly, this should be taxable in full as part of the profits of the business; but, by concession, Statement of Practice 4/97 allows that 'there may be excluded from taxable profits so much of any such commission as does not exceed the maximum amount the trader or professional person could reasonably have been expected to pass on to an arm's length customer buying the same services or product'. N.B. This would not usually mean all of the commission, as the business would be expected to retain a proportion itself.
The fact that there is no liability, does not mean that 'Fiasco' should make no mention of the commission on his tax return. Companies are, if requested, obliged to provide details of such payments to the Revenue's Taxes Information Distribution Office under section 16, Taxes Management Act 1970. It is therefore recommended that a note of the payment be made in the return's 'white space', but annotated that it is not considered to be a taxable receipt under SP4/97. - Southern Man.
Extract from reply by R.A.J.W.:
The then Pension Schemes Office of the Inland Revenue issued PSO Update 64 on 16 June 2000. Repeated there is the advice given previously that 'any commissions generated by direct or indirect movement of funds from one investment to another must be retained within the scheme and utilised in accordance with its Trust Deed and Rules'. This covered occupational pension schemes and personal pension schemes.
Ignoring this Revenue requirement could well lead to the pension scheme losing its tax approval.
