© Crown copyright 1997
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: email@example.com.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/statement-of-practice-4-1997/statement-of-practice-4-1997
1. This statement sets out the views of the Commissioners for HM Revenue and Customs (HMRC) of the correct treatment for tax purposes of commission, cashbacks and discounts. The passing on to customers by intermediaries or agents of the whole or part of commission and the payment of cashbacks or the granting of discounts by the providers of goods or services has become increasingly common. These arrangements have given rise to considerable uncertainty about the tax consequences for both customers and intermediaries which previous statements of practice were unable to resolve. This statement sets out HMRC’s practice in applying the law to these arrangements and in particular it confirms that most customers are not liable to tax on commission, cashbacks and discounts.
2. Sections A and B (paragraphs 3 to 10) set out both the different types of receipt and arrangements covered by the statement and when these receipts are not liable to tax. Section C is concerned with the liability to tax under the different cases of Schedule D. It sets out the circumstances in which commission, cashbacks and similar inducements will be taken into account as receipts:
- in computing taxable profits from a trade or profession under Case I or II of Schedule D
- in computing other taxable annual profits under Case VI (paragraph 19)
It also provides guidance on the deductibility of commission etc passed on to the customer:
- in computing profits under Case I or II paragraph 17; and
- in computing profits under Case VI paragraph 21
The rest of the statement is concerned with the tax treatment of persons receiving or becoming entitled to commission or a cashback under:
- the Income Tax (Earnings and Pensions) Act (ITEPA) 2003, covered in section D (paragraphs 23 to 32) - (the deductibility of commission passed on to the customer and the operation of Pay As You Earn (PAYE) are dealt with in paragraphs 33 and 34 respectively)
- Capital Gains Tax, covered in section E
- life insurance and personal pensions, covered in section F (paragraphs 36 to 41)
3. This statement covers:
- commission (meaning a sum paid by the providers of goods, investments or services to agents or intermediaries as reward for the introduction of business) - sometimes, commission is passed on to the customer or to some other person by the agent or intermediary, or the customer may receive commission direct from the provider of the goods or services if that provider would normally pay commission to an agent or intermediary
- cashbacks (meaning lump sums received by a customer as an inducement for entering into a transaction for the purchase of goods, investments or services and received as a direct consequence of having entered into that transaction (for example a mortgage)) - the payer may be either the provider of the goods, investments or services or another party with an interest in ensuring that the transaction takes place
- discounts (meaning that the purchaser’s obligation is to pay less than the full purchase price of goods, services or investments, other than as a result of any entitlement to commission or a cashback)
4. It deals with liabilities to Income or Corporation Tax under the rules of Schedule D, ITEPA, Capital Gains Tax or the chargeable events legislation (that is, the rules for taxing gains on certain insurances) and with tax relief in respect of contributions to personal pension schemes.
5. It is not practicable to cover in this statement every situation that may arise. There will be individual cases which do not fall squarely within its terms where the taxation consequences may be different. For example, where inducements or rewards offered to customers take the form of a series of payments (and are not simply capital sums calculated in advance but paid in instalments) they may be taxable as income in the recipients’ hands. It is beyond the scope of the statement to give a view on all such cases. They will have to be dealt with on an individual basis and the taxation consequences in each case will depend on the precise nature of the arrangements entered into.
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:
- 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 purchase 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
7. In general, ordinary retail customers purchasing goods, investments or services at arm’s length will not be liable to Income or Capital Gains Tax in respect of any commission, discounts or cashbacks received by them. For example, an ordinary retail customer who, when purchasing a car, negotiates to receive part of the commission earned on the sale by the salesperson will not be liable to Income or Capital Gains Tax in respect of that commission.
8. The statement outlines some circumstances in which receipts are treated as tax-free, or in which payments qualify for tax relief. However, the legal analysis, and consequent tax treatment, will not necessarily follow that outlined in the statement where the receipts or payments in question form part of a scheme of tax avoidance. Similarly, the treatment outlined in the statement may not apply where the recipient of a commission, cashback or other benefit is party to an arrangement under which the purchase price for goods, investments or services has been increased.
9. The tax treatment of the person receiving or becoming entitled to the commission or cashback will be considered separately from the treatment of the person paying the commission or cashback.
10. Unless otherwise indicated, all statutory references are to Income and Corporation Taxes Act 1988.
C. Schedule D
Cases I and II - receipts
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 below 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 (eg, 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 below 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 (indent) of paragraph 6 is a taxable business receipt but a discount or added value within the last 2 (items) of paragraph 6 above will not be a taxable receipt.
15. Commission etc receivable as an incident in the carrying on of any other business taxable under Cases I and II of Schedule D 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 cashback 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.
Cases I and II - deductions
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.
Presentation of information in tax return and/or accounts
18. This paragraph applies to commission etc which is passed on other than by a separate payment and is to be regarded as a taxable receipt as described in paragraph 13 above. In these circumstances, the calculation of the gross commission received and the amount passed on may not be a straightforward matter. Subject to the conditions described below, the commission applied in this way may be excluded from both commission income and commission expenses in the intermediary’s tax return. Those conditions are that either the customer required the commission to be passed on as a condition of entering into the transaction or the transaction was one between independent parties acting at arm’s length (see paragraph 17 above).
Case VI - receipts
19. Commission etc may sometimes be received by a person as consideration for introducing a customer to a supplier of goods or services, other than in circumstances where the commission would be taxable as income under Case I or II of Schedule D (see paragraph 11 above) or as employment income (see paragraph 25 below). Subject to paragraph 20 below, if the commission arises under an enforceable contract, it should be brought into account as a taxable receipt in calculating the profit from the transaction under Case VI of Schedule D.
20. A sum, however described, 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 in computing profits under Case VI. This is the case whether the payer is the provider of the goods or services or another party with an economic interest in ensuring the transaction takes place.
Case VI - deductions
21. Where, in the circumstances described in paragraph 19 above, some or all of the commission etc in question is passed on to the customer, a deduction is due where the customer requires the commission to be passed on as a condition of entering into the transaction or where for some other reason the payment is necessary to earn the commission.
Building society distributions
22. Cashbacks received from building societies are not required as distributions in respect of investments for the purposes of the Income Tax (Building Societies) (Dividends and Interest) Regulations, Statutory Instrument 1990/2231. Building societies are not therefore required to deduct tax from mortgage cashbacks by virtue of those Regulations.
D. Employment income
23. The word ‘employee’ means office holder or an employee. The word ‘earnings’ defined in section 62 ITEPA 2003 includes such things as salaries, fees, wages and profits.
24. 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 section 62 ITEPA 2003. In some circumstances liability to tax as employment income may arise under other provisions, such as the 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
25. 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 2003 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.
26. 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 2003 on that commission (but see paragraph 33 for circumstances where a deduction will be admissible).
27. Where the purchaser pays a discounted price, there is no tax liability on the employer if:
- 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
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 the discount is no greater than the sum of:
- the commission that would otherwise have been paid by the insurer on selling the policy to the third party
- the anticipated profit on the policy
Commission and discounts in respect of an employee’s purchase of goods, investments or services from the employer
28. Paragraphs 29 and 30 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 is concerned with tax charges under the benefits legislation. 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.
29. 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 2003 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 their benefit, the commission remains liable to tax.
30. Where an employee does not receive and is not entitled to receive, or to have applied for their 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 2003. 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.
31. Where an employee who is not in 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 paragraph 27 above. 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.
32. 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 ITEPA 2003 section 62) nor a benefit (within section 201 ITEPA).
However, if in such circumstances the cashback is provided gratuitously and is received from the employee’s employer, liability under the benefits code must be considered.
33. Where commission etc within the scope of this statement is taxable 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.
34. 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.
E. Capital Gains Tax
35. A cashback does not derive from a chargeable asset for Capital Gains Tax purposes. No chargeable gain therefore arises on receipt of the payment. (A cashback does not include a cash payment by a building society to members etc on take-over by, or conversion to, a bank, or by other mutual organisations such as insurance companies or friendly societies on demutualisation.)
F.Life insurance and personal pensions
Qualifying life insurance policies
36. Where commission etc in respect of a policy holder’s own qualifying life insurance policy is received, netted off or invested, that policy will not be disqualified as a result of entitlement to that commission if the contract under which commission arises is separate from the contract of insurance. In practice, HMRC will not seek to read 2 contracts as 1 in a way that would lead to the loss of qualifying policy status.
37. Where a policy holder pays a discounted premium in respect of his or her own policy, the premium payable under the policy will be the discounted premium. It is this amount that must be used for the purposes of establishing whether the relevant qualifying rules are met.
Calculation of chargeable event gains in respect of life insurance policies, capital redemption policies and life annuity contracts.
38. Chargeable event gains are computed by reference to the premiums or lump sum consideration paid. The amount paid will be interpreted as follows:
- where a policy holder pays a gross premium and receives commission etc in respect of that policy, the chargeable event gain is calculated using the gross amount paid without taking the commission received into account
- where an amount of commission etc is received or due under an enforceable legal right and subsequently invested in the policy, that amount is included as a premium paid when calculating the chargeable event gain
- where a policy holder nets off commission from an insurer in respect of his or her own policy from the gross amount of premium payable and the commission is not taxable as income on the policy holder, the chargeable event gain is calculated using the net amount paid to the insurer
- where a policy holder pays a discounted premium, the chargeable event gain is calculated using the discounted amount of premium paid
- where extra value is added to the policy by the insurer (for example by allocation of bonus units), the premium for the purpose of calculating the chargeable event gain is the amount paid by the policy holder without taking the extra value into account
Tax relief in respect of personal pension contributions
39. Tax relief for contributions to personal pension schemes is due in respect of ‘a contribution paid by an individual’. The amount of the contribution will be interpreted as follows where the contract under which the commission arises is separate from the personal pension scheme contract:
- where a contributor pays a gross contribution and receives commission in respect of that contribution, tax relief is given on the gross amount paid without taking the commission received into account
- where an amount of commission is received by, or is due under an enforceable legal right to, the contributor and subsequently invested in the personal pension that gave rise to the commission, tax relief is given on that amount
- where a contributor deducts commission in respect of his or her own pension contribution from the gross amount payable, relief is due on the net amount paid
- where a contributor pays discounted contributions, tax relief is due on the discounted amount paid
- where extra value is added to the policy by the insurer (for example by allocation of bonus units), relief is due on the amount paid by the contributor without taking the extra value into account
40. If commission were to be rebated to the contributor under the same contract as the personal pension contract, this would be an unapprovable benefit (since it would involve leakage of the pension fund to the member) which would jeopardise the tax-approved status of the arrangement.
41. 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. Alternatively, the misrepresentation as an annual premium of any premium applied to new pensions business so that a higher rate of rebated commission is generated will call into question the bona fides of the pension arrangement and jeopardise its approval from inception.
Note: this statement is as it appears in HMRC’s Statements of Practice (March 2009).