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Out for the discount

In concluding this series, I will look at the tax position of cashbacks and discounts.

A cashback is defined as “an inducement to enter into a transaction for the purchase of goods, investments or services and is received as a direct consequence of having entered into that transaction”. It is usually paid as a lump sum.

Let us look first at the position of investors. A cashback payment received by an investor who is an ordinary retail customer is not liable to income tax or capital gains tax.

When a cashback is received under a contract with an investor&#39s employer or a third party, which is disassociated from the employment contract, and the employee gives fair value for the cashback, it is not treated as an emolument of the employment if it is received on the same basis as is available to members of the public.

If a cashback is received gratuitously from the employer, then, as would be expected, the benefits-in-kind legislation could apply.

Turning now to discounts, where a discount is available, the client&#39s obligation is to pay less than the full purchase price for goods, services or investments, other than as a result of any entitlement to commission or a cashback.

Looking at the position of the financial adviser, where there is no express or implied agreement between the adviser and client as to commission or a cashback and less than the full purchase price is payable by the client without any explicit entitlement to a commission or a cashback, the amount of such a discount is not assessable on the adviser. This covers the situation where an adviser chooses to receive a lower scale of commission and a higher allocation of units is made to the investment.

The same would apply where an adviser receives a discounted amount to pay on to the product provider without any explicit entitlement to commission. Of course if the adviser charges the client a fee, this would be regarded as trading income in the normal way.

Let us look at a couple of examples. The first example involves an investment of £100,000. The adviser has the choice of commission from

0 to 5 per cent and he chooses 2 per cent. The value of the investment is enhanced by 3 per cent. No express or implied agreement on commission exists between the adviser and the client. The adviser is treated as receiving trading income of £2,000 because there is no express or implied agreement by all of the parties as to commission.

In the second example, the same adviser chooses to take 1 per cent commission and charges a £500 fee. They are treated as receiving trading income of £1,500 (£1,000 commission plus £500 fee).

It is worth looking at the position of discounts received by employees of advisers. We need to look at two situations – sales to third parties and on products effected by the employee for his or her own benefit.

Where an employee makes arrangements for an unconnected third party to pay a discounted purchase price, and nothing in money or capable of being turned into money is received by the employee, there may still be a tax liability under the benefits-in-kind legislation. This can arise if the employee is within the benefits-in-kind legislation and the employee or a member of his or her family or household is provided with any benefit.

In these circumstances, there will always be a charge under Schedule E where the benefit is provided by the employer but, when it is provided by anyone else, the charge will depend on whether the benefit is provided by reason of employment. The amount chargeable is the cost of providing the benefit, with no account taken of the price or premium paid.

When it comes to considering an employee&#39s own policy, where an employee is a higher-paid employee or director, which means he or she is within the benefits-in-kind legislation, he or she is liable to tax on any benefit provided for him or her in respect of the employment. Any benefit is deemed in the circumstances to arise by reason of employment and is, therefore, subject to tax under Schedule E.

Benefits provided by persons other than the employer may also give rise to a charge if the benefit is provided by reason of employment.

It is important to note that, in the case of a discounted insurance policy, it is accepted that, where the discount is no greater than the sum of the commission which would have otherwise been paid by the insurer on selling the policy to a third party and the anticipated profit on the policy, then no taxable benefit arises.

For investors, no amount is taxable for ordinary retail customers in respect of any discount.

If the policy in question is a qualifying policy, it is the discounted premium that is taken into account in applying the qualifying policy rules. The amount paid for the purpose of calculating any chargeable event gains under the policy is the discounted premium.

For discounts received in respect of personal pension and retirement annuity contracts, tax relief is calculated by reference to the discounted premium paid.

Finally, where an unadjusted purchase price is paid and there is no entitlement to commission or cashback, extra value may be added to the investment, for example, the allocation of bonus units which could arise, for example, on early application for a guaranteed bond. There is no amount subject to tax on the adviser. Employees of an adviser will be treated in the same way as for a discount and investors will suffer no tax liability.

In applying the qualifying policy rules and for the purposes of calculating any gain on a chargeable event, the premium paid is taken into account. Tax relief on a personal pension or retirement annuity contract is calculated by reference to the premium paid.

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