MISCELLANEOUS Availability of network

27. It is expected that the ELS network will be available to filers generally for 24 hours per day. Any unavailability of the system (e.g. to allow for maintenance), whether or not scheduled, will be notified by the SMG provider to filers. The availability of the network will be subject to a Service Agreement between HM Revenue and Customs and the SMG provider.

Acknowledgements

28. Any return received at the SMG should result in an acceptance or rejection message being available for collection by the agent within the next working day. The exact details will depend on the Service Agreement between HM Revenue and Customs and SMG provider as well as the computer technologies used.

29. A filer will get a ‘non delivery’ report as part of the process where, in exceptional circumstances, the file has not been successfully transmitted to the SMG (for HM Revenue and Customs). The absence of this message indicates that the package has been received, but not opened, at the SMG. Filers will also be able to optionally request a delivery report confirming that the file containing the return or returns has been received but not yet processed.

Date of Receipt

30. The legislation provides that the obligation to deliver a return is not fulfilled until four conditions are met. The first three are the approval of the filer, the approval of the

transmission process and the authentication of a hard copy. The fourth condition is that the information transmitted to HM Revenue and Customs is accepted. That is notified to the filer when HM Revenue and Customs issue an acceptance signal in respect of the information.

31. It follows that until HM Revenue and Customs have issued this acceptance of the information, the filing obligation is not fulfilled. For this reason, taxpayers and filers are strongly advised to ensure that the transmission is made at least 24 hours before the end of the day on which the time limit for submitting the return expires.

32. However, it is a feature of the system that the date on which the electronic return is lodged with the SMG is recorded. Provided this date is no later than the end of the period by which the return may be delivered, and that the information is not rejected for any reason, a penalty for late submission will not normally be sought, even though the acceptance signal may be transmitted after the due date. As this inevitably involves a certain degree of risk, taxpayers and filers should not rely on this practice to file returns via ELS on the due date.

33. Where a return is rejected the same rules will apply to the date of its resubmission and final acceptance.

Rejections

34. Where returns are rejected by the ELS system a suitable message will be sent back to the filer. This will detail why the processing of the return has not been possible. The filer can then correct the return and resubmit the information electronically. Where the information changes in any way the resubmission will require a fresh authorisation by the taxpayer.

35. It should be noted that this resubmission does not include the transmission of an amended return (i.e. one altered other than in response to a rejection message) following a previously accepted one. Amended returns must be submitted on paper.

SP2/97 Authorised unit trusts, approved investment trusts, and open-ended investment companies: Monthly savings schemes (superseded by SP2/99)

SP3/97 Investment trusts investing in authorised unit trusts or open-ended investment companies

Introduction

1. This Statement of Practice sets out HM Revenue and Customs’ views on the tax implications of investment by investment trusts in authorised unit trusts (AUTs) or open-ended investment companies (OEICs) incorporated in the United Kingdom.

2. For the purposes of the Tax Acts, each sub-fund of an AUT which is an umbrella scheme is regarded as an AUT in its own right, and the umbrella scheme itself is not regarded as an AUT.

Similarly, each sub-fund of an OEIC which is an umbrella company is regarded as an OEIC in its own right, and the umbrella company itself is not regarded as an OEIC.

3. Where a sub-fund of an umbrella scheme is treated as an AUT for tax purposes,

references in this Statement to the units of that AUT are to be regarded as references to the rights or interests (however described) of those persons who for the time being have rights in the sub-fund in question. Similarly, where a sub-sub-fund of an umbrella company is treated as an OEIC for tax purposes, references in this Statement to the shares of that OEIC are to be regarded as references to the shares in issue of the umbrella company which for the time being confer rights in the sub-fund in question.

Approval of investment trusts

4. A company has to satisfy the various tests set out in section 842 of the Income and Corporation Taxes Act 1988 for a particular accounting period if it is to be approved by HM Revenue and Customs as an investment trust for that accounting period. HM Revenue and Customs accept that units in AUTs and shares in OEICs are to be treated as shares in companies for the purposes of those tests.

5. In the majority of cases, no further point arises, since companies seeking approval as investment trusts do not generally have substantial investments in AUTs or OEICs. However, where there is substantial investment of this sort, the test in section 842(1)(b) may be relevant.

This is because this test restricts the size of an investment trust's holding in any one company, except in the case of a company that:

• is itself an approved investment trust; or

• would qualify as an investment trust but for the public listing test in section 842(1)(c).

6. HM Revenue and Customs consider that for the purposes of section 842(1)(b), an AUT or OEIC can, provided it meets one condition, be regarded as a company which would qualify as an investment trust but for the listing test. As a result there is no restriction on the size of the company's investment in that AUT or OEIC.

7. The condition to be met reflects the test in section 842(1)(a). It is that, for the period of time in the investing company's accounting period during which it held investments in an AUT or OEIC, the income of the AUT or OEIC concerned consisted wholly or mainly of ‘eligible

investment income’.

8. For these purposes, ‘eligible investment income’ is income deriving from shares or securities, or ‘eligible rental income’ within the meaning of section 508A of the Income and Corporation Taxes Act 1988.

9. HM Revenue and Customs consider that this condition will always be satisfied where the AUT concerned is:

• a ‘securities fund’ for the purposes of the Regulations for AUTs which have been made by the Financial Services Authority (FSA) under the Financial Services Act 1986; or

• a sub-fund of an authorised umbrella scheme which, according to the terms of the scheme, would be a securities fund if it were itself the subject of an authorisation order.

10. Similarly, HM Revenue and Customs consider that the condition will always be satisfied where the OEIC concerned is:

• a ‘securities company’ for the purposes of the corresponding FSA Regulations for OEICs incorporated in the United Kingdom; or

• a sub-fund of an umbrella company which, according to the company's instrument of incorporation, would be a securities company if it were itself the subject of an authorisation order.

11. Where the AUT or OEIC concerned does not fall within the categories described in paragraph 9 or 10 above, the question as to whether the relevant income consisted wholly or mainly of eligible investment income (and so whether that AUT or OEIC could count as the equivalent of an investment trust for the purposes of Section 842(1)(b)) will be tested by reference to the facts.

12. HM Revenue and Customs consider that this test has to be applied for each accounting period in which the company investing in an AUT or OEIC continues to be so invested. And, for the purpose of this test, income is regarded as consisting wholly or mainly of eligible investment income if at least 70 per cent of it is eligible investment income.

SP4/97 Taxation of commission, cashbacks and discounts Introduction

1. This Statement sets out the views of the Commissioners for Her Majesty’s Revenue and Customs of the correct treatment for tax purposes of commission, cashbacks and discounts. The passing on to customers by intermediaries or agents of the whole or part of commission and the payment of cashbacks or the granting of discounts by the providers of goods or services has become increasingly common. These arrangements have given rise to considerable uncertainty about the tax consequences for both customers and intermediaries which previous Statements of Practice were unable to resolve. This Statement sets out HM Revenue and Customs’ practice in applying the law to these arrangements and in particular it confirms that most customers are not liable to tax on commission, cashbacks and discounts.

2. Sections A and B (paragraphs 3-10) set out both the different types of receipt and arrangements covered by the Statement and when these receipts are not liable to tax.

Section C is concerned with the liability to tax under the different cases of Schedule D. It sets out the circumstances in which commission, cashbacks and similar inducements will be taken into account as receipts

• in computing taxable profits from a trade or profession under Case I or II of Schedule D (paragraphs 11-15);

• in computing other taxable annual profits under Case VI (paragraph 19).

It also provides guidance on the deductibility of commission etc. passed on to the customer

• in computing profits under Case I or II (paragraph 17);

and

• in computing profits under Case VI (paragraph 21).

The rest of the Statement is concerned with the tax treatment of persons receiving or becoming entitled to commission or a cashback under

• the Income Tax (Employments and Pensions) Act 2003 (ITEPA), covered in section D (paragraphs 23-32). (The deductibility of commission passed on to the customer and the operation of PAYE are dealt with in paragraphs 33 and 34 respectively);

• Capital Gains Tax, covered in section E (paragraph 35);

and

• Life insurance and personal pensions, covered in section F (paragraphs 36-41).

A. Scope

3. This Statement covers

• Commission (meaning a sum paid by the providers of goods, investments or services to agents or intermediaries as reward for the introduction of business). Sometimes, commission is passed on to the customer or to some other person by the agent or intermediary, or the customer may receive commission direct from the provider of the goods or services if that provider would normally pay commission to an agent or intermediary.

• Cashbacks (meaning lump sums received by a customer as an inducement for entering into a transaction for the purchase of goods, investments or services and received as a direct consequence of having entered into that transaction (for example a mortgage)). The payer may be either the provider of the goods, investments or services or another party with an interest in ensuring that the transaction takes place.

• Discounts (meaning that the purchaser's obligation is to pay less than the full purchase price of goods, services or investments, other than as a result of any entitlement to commission or a cashback).

4. It deals with liabilities to income or corporation tax under the rules of Schedule D ITEPA, capital gains tax or the chargeable events legislation (that is, the rules for taxing gains on certain insurances) and with tax relief in respect of contributions to personal pension schemes.

5. It is not practicable to cover in this Statement every situation that may arise. There will be individual cases which do not fall squarely within its terms where the taxation consequences may be different. For example, where inducements or rewards offered to customers take the form of a series of payments (and are not simply capital sums calculated in advance but paid in

instalments) they may be taxable as income in the recipients' hands. It is beyond the scope of the Statement to give a view on all such cases. They will have to be dealt with on an individual basis and the taxation consequences in each case will depend on the precise nature of the arrangements entered into.

B. General

6. The Statement covers the main circumstances in which commission or a cashback is likely to be passed between the parties to a transaction. It deals with arrangements where

• commission or a cash-back is - received

- netted-off (meaning that the purchaser's entitlement to commission or a cash-back is set off against the obligation to pay the full purchase price for goods or services so that only the net amount is paid), or

- invested or applied in some way for the benefit of the purchaser or where

• a discounted purchase price is paid, or

• extra value is added to the goods, investments or services obtained for the purchase price where there is no entitlement to commission or a cash-back. An example is the allocation of bonus units in an investment or of a different class of unit where the purchase price remains unchanged. However, where the added value represents a return on the investment, the tax treatment may differ from that dealt with in this statement.

7. In general, ordinary retail customers purchasing goods, investments or services at arm's length will not be liable to income or capital gains tax in respect of any commission, discounts or cashbacks received by them. For example, an ordinary retail customer who, when purchasing a car, negotiates to receive part of the commission earned on the sale by the salesperson will not be liable to income or capital gains tax in respect of that commission.

8. The Statement outlines some circumstances in which receipts are treated as tax-free, or in which payments qualify for tax relief. However, the legal analysis, and consequent tax treatment, will not necessarily follow that outlined in the Statement where the receipts or payments in question form part of a scheme of tax avoidance. Similarly, the treatment outlined in the Statement may not apply where the recipient of a commission, cashback or other benefit is party to an arrangement under which the purchase price for goods, investments or services has been increased.

9. The tax treatment of the person receiving or becoming entitled to the commission or cashback will be considered separately from the treatment of the person paying the commission or cashback.

10. Unless otherwise indicated, all statutory references are to the Income and Corporation Taxes Act 1988.

C. Schedule D Cases I and II - receipts

11. Where the provision of the services remunerated by commission etc. is on a sufficiently commercial, regular and organised basis to amount to a trade or profession, commission and similar sums to which the trader or professional person becomes entitled will be receipts from that source. A self-employed insurance or travel agent would normally be in that position.

12. The fact that some or all of the commission etc. received by a trader or professional person in the circumstances described in paragraph 11 is passed on to customers does not cause it to cease to be a receipt of that business. See paragraph 17 below regarding the corresponding deduction.

13. Furthermore, commission etc., which would have been taxable if it had actually been received by a trader or professional person, does not necessarily cease to be taxable merely because it goes directly to the customer without first being received by the trader. For example, commission may be passed on by way of a reduction in regular insurance or pension policy premiums or by the allocation of extra value (e.g. units) to the policy by the insurance company.

In those circumstances, the commission remains a taxable business receipt so long as the trader or professional person had an enforceable legal right to receive that commission which he

subsequently forgoes in favour of the customer (but as indicated at paragraph 17 below a deduction may be available in respect of the amount forgone).

14. Where the trader or professional person neither receives the commission etc. nor has any such entitlement to it, there will be no taxable receipt in respect of that commission. Thus commission or a cashback payable to a trader or professional person within the first bullet of paragraph 6 is a taxable business receipt but a discount or added value within the last two bullets of paragraph 6 above will not be a taxable receipt.

15. Commission etc. receivable as an incident in the carrying on of any other business taxable under Cases I and II of Schedule D should be taken into account in computing the profits of the business. For example, the following items should be taken into account in computing the profits of the business:

• insurance commission to which an accountant becomes entitled in the course of the profession;

• commission received in respect of business insurance contracts taken out by, say, a grocer (for example, if the premium paid has been reduced by the commission, by deducting only the net sum);

• a cashback received on a car purchased for business purposes (normally by reducing the cost of the car for the purposes of capital allowances).

16. In strict law commission earned for business introduced in the course of a trade or profession remains a taxable business receipt even where it is derived from a private transaction funded by the trader or professional person. For example, a travel agent may obtain commission for booking a package holiday for himself and his family with a tour operator whose holidays he sells to the public. But, by concession, there may be excluded from taxable profits so much of any such commission 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.