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Tax clarifications of transfer of commission business

In the recent case of Brewin v McVittie (Inspector of Taxes) heard before the Special Commissioners, a self employed financial adviser who had sold the products of Allied Dunbar (AD) attempted to argue that the sum received by her from AD (in fact an AD group company) in return for the benefit of contracts completed by the taxpayer with her clients, including her entitlement to commissions, was a capital sum chargeable to capital gains tax against which she was entitled to retirement relief.


The taxpayer had been a self-employed financial adviser tied to AD. In 1995 she wanted to retire. In February 1995 she agreed to sell the goodwill of business for a sum of £8,000 to another adviser, Y. This sale was not completed until August 1995. The mechanics of the sale were that Y would pay the £8,000 to AD who would then pay this to the taxpayer (disposer) less AD&#39s fee.


So AD was inserted as a &#39middleman&#39. In April 1995 the taxpayer entered into an agreement to continue to manage the business for 12 months or until a subsequent sale by AD, if earlier.


At the same time the taxpayer agreed to sell to AD the benefit of contracts concluded with her clients and her entitlement to commission from these contracts.


The price was £33,415.50 payable immediately and £11,138.50 payable 12 months later.


In the period between the sale to AD and AD&#39s subsequent sale to Y the taxpayer (acting as agent) sold only one policy. The taxpayer claimed that she ceased business when it was sold to AD in April 1995, and that the work she did until August, when the business was transferred to Y, was as an agent for AD.


In April, when the business was transferred to AD, AD paid £8,000 (the price for the goodwill agreed between the taxpayer and Y) plus a sum in excess of £40,000 that represented commissions earned by the taxpayer. It was the taxpayers position that the total of these sums represented the capital value of the business, as the right to receive the commissions she had earned had been sold to AD.


In August 1995 AD then sold the business to Y for £8,000 as originally intended.


The commissioners did not accept that the taxpayer had ceased trading before the transfer of the business to Y. Even though the £8,000 paid by AD to the taxpayer, and later by Y to AD was not in dispute, i.e. it was accepted that this was a capital sum, the commissioners did not accept that there had been a transfer of the business to AD in April 1995.


The commissioners agreed with the Revenue that using the Ramsey principles (i.e. substance over form) there was in fact only one transaction i.e. that between the taxpayer and Y.


The consideration that the taxpayer received (indirectly) from Y was only £8,000, as the right to receive commissions earned by the taxpayer had not been transferred to Y. The insertion of AD as a &#34middleman&#34 had no commercial purpose from the taxpayers perspective other than to avoid tax. AD&#39s purpose in operating the scheme was not seen as relevant to the arguments of the taxpayer.


Therefore the sums representing the sale of commissions paid by AD after the &#34supposed&#34 April transfer were deemed to be income subject to income tax.



COMMENT



It is assumed that this arrangement fell under what is generally known in the financial services as a &#34practice buy-out&#34 arrangement. One would not be surprised if, to the uninitiated, the facts of this case look somewhat convoluted and the scheme more than a little fatuous. It is not known whether this scheme was typical of others operated by AD and other companies. Regardless of this all of those operating practice buy-out arrangements should, as a result of this case, consider the tax implications.



Of course, it must not be forgotten that this case is nevertheless a commissioner&#39s decision only.


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