EIM64605 - Tax treatment of insurance agents: Statement of Practice SP4/97

Statement of Practice SP4/97 was drawn up in consultation with representatives of the insurance industry. The part of SP4/97 dealing with employees and office holders is reproduced below. The guidance that it contains applies to all employees who receive discounted goods or services from their employer, whether or not they work in the insurance industry.

Employment Income

  1. The word “employee” means office holder or an employee. The word “earnings” defined in section 62 ITEPA includes such things as salaries, fees, wages and profits.
  2. It is a question of fact whether a sum within the scope of this Statement is received in the capacity of employee, office holder or in some other capacity such as the purchaser of a policy, goods or services. This part of the Statement covers only liability arising on earnings from employment and liability under the benefits code in section 63 ITEPA. In some circumstances liability to tax as employment income may arise under other provisions, such as the vouchers legislation or legislation dealing with termination and change payments. Those provisions should be considered even where there is no liability under the provisions considered here.

Commission arising from, and discounts in connection with, goods, investments or services sold to third parties

  1. Employees who receive, or are entitled to receive, commission (as earnings) from their employment in respect of goods, investments or services sold to third parties are assessable under section 62 ITEPA on the full amount of that commission. This is so whether or not the commission is passed on by them to the customer and whether the commission is paid by the employer or anyone else.
  2. Where an employee consents or directs that commission which is due from his or her employment should be either paid to the customer or anyone else, or invested for his or her own benefit or the benefit of the customer or anyone else, that employee is assessable under section 62 ITEPA on that commission (but see paragraph 33 for circumstances where a deduction will be admissible).
  3. Where the purchaser pays a discounted price, there is no employment income liability on the employee. If the purchaser is a member of the employee’s family or household, the provision of goods or services at a discount may constitute a taxable benefit for the employee. However, where the discounted price paid covers the cost of those goods or services to the provider, there will be no taxable benefit.

In all cases the cost of providing goods or services is a question of fact. But where the sale is of an insurance policy there will be no taxable benefit if both of the following apply:

  • the purchaser is not a member of the employee’s family or household
  • neither the employee nor any member of his or her family or household receives anything (money or benefits) in consequence

Commission and discounts in respect of an employee’s purchase of goods, investments or services from the employer

  1. Paragraphs below are concerned with cases of commission arising from employment. Where a commission is available to an employee on the same basis as it is available to members of the general public, it will not arise from the employment. Paragraph 31 of SP4/97 is concerned with tax charges under the benefits code. Where the commission or the net or discounted amount referred to within that paragraph is available on the same basis to members of the general public, no benefit will result.
  2. Employees who receive commission (from employment) in respect of their own purchase of goods, investments or services from the employer are liable to tax under section 62 ITEPA on the full amount of that commission. Where such a commission is placed at the employee’s disposal but the employee requests, permits or is required to accept that the commission is applied in some way for his or her benefit, the commission remains liable to tax as employment income.
  3. Where an employee does not receive and is not entitled to receive, or to have applied for his or her benefit, a cash commission, but does receive from employment a right which has a monetary value, a liability will arise on that value because that right counts as earnings within section 62 ITEPA. An example is the case where an additional amount is invested in an employee’s investment and that investment can be disposed of or otherwise turned to account.
  4. Where an employee who is not lower paid employment (see section 217 ITEPA) receives a commission from, or pays a net or discounted amount to, the employer in respect of his or her purchase of goods, investments or services, the employee will be liable to tax on the benefit that has been provided. The charge to tax upon a net or discounted amount is calculated following the principles described in SP4/97. The charge upon a commission, not otherwise chargeable to tax, is calculated by reference to the cost of its provision and will typically be the amount paid.

Services etc. provided by persons other than the employer in return for commission, or for a net or discounted purchase price, may give rise to a charge calculated in the same way if the benefit is provided by reason of the employment.

Cashbacks

Where an employee receives a cashback from his or her employer or a third party on the same basis as is available to members of the general public, no amount is chargeable to tax as employment income if the cashback is received under a contract with the employer or third party dissociated from the contract of employment, and the employee gives fair value for the cashback under that contract or by entering into some other contract with the employer or third party. The cashback will then be neither earnings from employment (within section 62 ITEPA) nor a benefit (within the benefits code).

However, if in such circumstances the cashback is provided gratuitously and is received from the employee’s employer, liability under the benefits legislation must be considered.

Deductions

Where commission etc. within the scope of this Statement is taxable as employment income, a claim for deduction in respect of commission shared with, passed on to, or invested for the benefit of, some other party will be admissible if the employee is obliged to expend the sum wholly, exclusively and necessarily in performing the duties of the office or employment. Such an obligation is likely to exist when the transaction falls within the normal framework of the employer’s business and is a transaction between independent parties acting at arm’s length.

PAYE

PAYE applies where commission etc. is paid to an employee or on his or her behalf if it is taxable as employment income. This includes amounts relating to commission invested on behalf of the employee if the amount of the commission is taxable. Where commission or other taxable income is provided in the form of readily convertible assets rather than cash, PAYE applies under section 696 ITEPA.