HMRC's response re RBS/NatWest switching incentive

So, after not really finding a conclusive answer to the question if the RBS/NatWest switching incentive payment is taxable upon a sole trader or partnership when received for switching their business bank account, I decided to ask HMRC's Non-Statutory Clearance Service the question.

This is the response they came back with, impressively just 2 days after asking!

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My understanding is that the amounts here were received from each of your clients’ “new” bank after switching their business bank account from Natwest. The facts appear to be that the clients have taken advantage of the RBS Business Banking Switch whereby eligible customers of RBS (including Natwest) were induced to switch their accounts following the agreements made around the RBS government bailout.

My reading of the guidance at BIM100210 and within Statement of Practice 4/97 is that this payment do fall within the definition of cashback, and thus the payments are taxable when received by a business conducting a trade.

Statement of Practice 4/97 states at Para 3 that cashback is “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”.

This is comparable to your clients’ positions as the amounts received are lump sums and are received by each client as an inducement for entering into a transaction for services (banking). My understanding of the RBS scheme, if that is the fact pattern, is that the receiving/participating banks decide on the incentives, so it is (e.g.) the Co-op Bank paying for the business. The fact that the participating bank wishes to pay (e.g.) £4,000 for the business suggests they will obtain more compensation for their banking services than this amount.

The amount may also fall within the definition of commission, defined again in Para 3 as “(meaning a sum paid by the providers of […] services to agents or intermediaries as reward for the introduction of business) - sometimes, […] 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”. Here, your clients have received a reward for the introduction of their business.

Whether cashback, commission or both, this amount appears to fall within the scope of SOP 4/97.

SOP4/97 goes on at Para 15 to say that:

“Commission etc [meaning to include cashbacks] receivable as an incident in the carrying on of any other business taxable under Cases I and II of Schedule D [meaning trading income] 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: […] commission received in respect of business insurance contracts taken out by, say, a grocer […]; a cashback received on a car purchased for business purposes”

It is my understanding that your clients are trading (so within Cases I and II of Schedule D to use the pre-CT-rewrite terminology). They have received an amount of commission/cashback because of an incident of their trade (changing their business bank account). The situation is only marginally different to the example of the grocer receiving commission for insurance services (i.e. banking rather than insurance services), and is analogous to the business car cashback example (a good or service has been contracted for and an inducement paid for it).

Thus I consider that these amounts are taxable as trading income and should be included in computations of taxable profit from the trade of the partnership (or in other clients where they are engaged in a trade).