In this final instalment of the Robertson case, I will look at why it was decided that the whole of the commission paid to an insurance adviser was assessable on receipt despite the fact that some clawback might take place.
The Special Commissioners considered that the payments made by Allied Dunbar to the taxpayer on indemnity terms were advances of commission rather than loans.
This conclusion was supported by the fact that the advancements were so described in the agency contract, which only referred to them as debts once the premiums had ceased, resulting in commission clawback, rather than at the point of payment.
The taxpayer had received the advances as consideration for his services, subject to a discount because payment had been accelerated.
The Special Commissioners stated that the taxpayer had adopted an acceptable method of accounting in full for the advance payments for the two years prior to that in question.
It had clearly been unnecessary to include a provision for lapsed policies in view of the wide margin between the 50 per cent of initial commission advanced and the 87 per cent of policies expected not to lapse.
The Special Commissioners then accepted the evidence of the Revenue expert that the upfront method and the deferred accruals method of accounting were acceptable.
It was their job, therefore, to decide which was the correct principle of commercial accountancy to be applied in the case under consideration in light of what had happened previously in respect of that taxpayer and also in light of SSAP2, so as to determine the date at which it could be ascertained with reasonable certainty whether the advances had been ultimately realised for the purposes of the concept of prudence and, also, for determining the change in the taxpayer's net assets arising out of his transactions in the period in accordance with the accruals concept.
As stated above, the Special Commissioners were of the view that it could be determined with reasonable certainty that the 50 per cent commission advanced had been in effect realised.
In support of this, the Special Commissioners stated that the taxpayer had received monthly schedules from Allied Dunbar and had clearly been aware of the lapse rate of the policies that he had sold and would presumably have endeavoured to contact clients whose policies had lapsed if only to protect his own commission.
They also stated that Allied Dunbar had reserved the right to defer payment of advances to protect itself and the agent from bad debts.
Especially in light of this last point, it would have been surprising if Allied Dunbar had not itself monitored the position carefully and made its insurance agent aware if the lapse rate was slipping beyond what they considered accep table.
The Special Commissioners then agreed that the evidence of the Inland Revenue's expert – that the upfront method matched revenue and cost more closely than the deferred accruals method and, therefore, was more realistic – was acceptable.
The Special Commissioners concluded that the prudence concept did not preclude the use of the upfront method in the case under consideration although the taxpayer was a sole trader.
The Special Commissioners also stated that the bigger the advance, the stronger would be the case for the deferred accruals method because the greater would be the possibility of clawing back some of the advance.
In the facts of this particular case, however, the advance was only 50 per cent and history had shown that for this taxpayer the lapse rate was only 13 per cent.
In conclusion, then, the Special Commissioners stated that the correct principle of commercial accounting practice to be applied in light of the facts and circumstances of the Robertson case was the upfront method, whereby advances were recognised in full in the accounts for the period in which they were received.
This is useful further endorsement of the Inland Revenue's view of the treatment of indemnity commission.
Clearly, the loan argument has once again been discredited.
It is not inconceivable, of course, that a contract could be agreed which may strengthen an argument that advancements of commission are loans.
However, this does not seem to be in any way standard practice currently. As a result, the basic principle that commission, even indemnity commission, is taxable when earned, subject only to a reasonable deduction for likely lapses based on past evidence, looks set to continue and must be taken into account by all those receiving indemnity commission.