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HMRC internal manual

Business Income Manual

Specific receipts: insurance and other commission: own commission

In the case of a trade such as an insurance broker or travel agent it is clear that the commission received from the insurer, tour operator etc for persuading customers to purchase their services arises from that trade. Commission may also be earned on services (or goods) the agent or their family purchase for their own use or enjoyment. Commission earned in this way arises from the trade just like ordinary commission the trader earns. It represents consideration for placing a particular piece of business the way of a concern that provides the trader with their ordinary trading receipts. The service provided by the trader to the payer of the commission is the same whether it relates to a transaction with ordinary customers of the trader or a private transaction with the trader himself or herself.

Statement of Practice SP4/97 paragraph 16 (see BIM40655), by concession, exempts some of this ‘own commission’ from tax. It accepts that there may be excluded from taxable profits so much of any commission earned in this way 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. Since it would be extremely unusual for a trader to pass on all their commission to an arm’s length customer, a balance of commission will remain a taxable trading receipt.

Detailed enquiries into the precise amount of commission that would be passed on to an arm’s length customer will not often be appropriate. But if enquiries are made the trader should be asked to provide evidence of commission actually passed on to customers purchasing goods or services similar or comparable to those purchased by the trader.