Over the last few weeks, my articles have considered the deeper tax implications of commission rebates, cashbacks and discounts both for IFAs and their clients.
I concluded last week with a brief look at PSO Update 33, which deals with commission rebates arising as a result of the direct or indirect movement from one investment vehicle to another, and mentioned that it gives examples of transactions which could compromise the tax approval of occupational and personal pension schemes. The relevant parts are considered below.
Occupational pension schemes
Where funds that are held by trustees for the purposes of an exempt approved retirement benefits scheme are used to purchase a policy of insurance or any other investment, the customers of the intermediary and/or insurance company are the scheme's administrator/trustees in that capacity and not in any other capacity, for example, a personal capacity.
Any commission or reward which emerges as a result of a transfer or new investment of the existing funds of such a scheme and which is rebated by the intermediary to the client, or paid direct to the customer by the insurance company, is therefore receivable by the administrator/trustees in that capacity. It must therefore be retained within the scheme and utilised in accordance with its trust deed and rules.
Any such commission or reward on the transfer or new investment of existing funds, which is paid other than to a person in their capacity as the administrator/trustee of the scheme concerned, for example, to or for the benefit of any person (including a company) connected with the scheme, would be regarded by the PSO as a non-relevant benefit from the scheme.
This would call into question the manner in which the scheme is being administered and could result in withdrawal of approval from the scheme under section 591B Income and Corporation Taxes Act (ICTA) 1988.
Withdrawal of approval could involve a 40 per cent tax charge under section 591C ICTA 1988 on the value of the whole of the scheme's assets immediately prior to the offending transaction. Additional tax charges of up to 40 per cent could also arise on the recipient of the unauthorised benefit under section 596A, 600 or 601 ICTA 1988, as appropriate.
For the purposes of the above, persons connected with a scheme include an employer in relation to that scheme, a member of that scheme or any person (including a company) connected with a member within the meaning of the Retirement Benefits Schemes (Restriction on Discretion to Approve) (Small Self-administered Schemes) Regulations 1991 (SI 1991 No 1614).
Personal pension schemes
Where a transfer payment is made from one personal pension scheme to another with the result that commission, other than commission paid to and retained as income by an intermediary, is paid for a purpose other than the provision of benefits under the scheme, the receiving arrangement may be regarded as set up other than for the sole purpose of providing approved benefits and its approval withdrawn from inception.
The transfer payment may then be regarded as an unauthorised payment by the transferring scheme taxable under section 647 ICTA 1988 at up to 40 per cent on the individual who made the personal pension arrangement.