BIM40655 - Specific receipts: insurance and other commission: computation of profits

The paragraphs of SP4/97 relevant to the computation of the taxable profits of a trade or profession are reproduced below.

“Receipts [of a trade or profession]

6. The statement covers the main circumstances in which commission or a cashback is likely to be passed between the parties to a transaction. It deals with arrangements where commission or a cash-back is:

• received
• netted-off (meaning that the purchaser’s entitlement to commission or a cash-back is set off against the obligation to pay the full purchase price for goods or services so that only the net amount is paid) or
• invested or applied in some way for the benefit of the purchaser
• a discounted purchased price is paid or
• extra value is added to the goods, investments or services obtained for the purchase price where there is no entitlement to commission or a cash-back - an example is the allocation of bonus units in an investment or of a different class of unit where the purchase price remains unchanged, however, where the added value represents a return on the investment, the tax treatment may differ from that dealt with in this statement

…

11. Where the provision of the services remunerated by commission etc is on a sufficiently commercial, regular and organised basis to amount to a trade or profession, commission and similar sums to which the trader or professional person becomes entitled will be receipts from that source. A self-employed insurance or travel agent would normally be in that position.

12. The fact that some or all of the commission etc received by a trader or professional person in the circumstances described in paragraph 11 is passed on to customers does not cause it to cease to be a receipt of that business. See paragraph 17 regarding the corresponding deduction.

13. Furthermore, commission etc, which would have been taxable if it had actually been received by a trader or professional person, does not necessarily cease to be taxable merely because it goes directly to the customer without first being received by the trader. For example, commission may be passed on by way of a reduction in regular insurance or pension policy premiums or by the allocation of extra value (e.g. units) to the policy by the insurance company. In those circumstances, the commission remains a taxable business receipt so long as the trader or professional person had an enforceable legal right to receive that commission which he subsequently forgoes in favour of the customer (but as indicated at paragraph 17 a deduction may be available in respect of the amount forgone).

14. Where the trader or professional person neither receives the commission etc nor has any such entitlement to it, there will be no taxable receipt in respect of that commission. Thus commission or a cashback payable to a trader or professional person within the first bullet of paragraph 6 is a taxable business receipt but a discount or added value within the last two bullets of paragraph 6 will not be a taxable receipt.

15. Commission etc receivable as an incident in the carrying on of any other [trade or profession] should be taken into account in computing the profits of the business. For example, the following items should be taken into account in computing the profits of the business:

• insurance commission to which an accountant becomes entitled in the course of the profession,
• commission received in respect of business insurance contracts taken out by, say, a grocer (for example, if the premium paid has been reduced by the commission, by deducting only the net sum),
• a cash-back received on a car purchased for business purposes (normally by reducing the cost of the car for the purposes of capital allowances).

16. In strict law commission earned for business introduced in the course of a trade or profession remains a taxable business receipt even where it is derived from a private transaction funded by the trader or professional person. For example, a travel agent may obtain commission for booking a package holiday for himself and his family with a tour operator whose holidays he sells to the public. But, by concession, 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.

17. Commission etc. passed on to a customer, or otherwise forgone in the circumstances described in paragraph 13 above, 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. The statutory test is very likely to be satisfied if the customer required the commission to be passed on as a condition of entering into the transaction or if the transaction was one between independent parties acting at arm’s length. …”