The rebate risk – Money Marketing money laundering laws in pakistan

The way that the scheme was thought to work has been covered extensively but it is worth quickly summarising this again to put the blocking of the scheme into context. What happened was that the investor paid a premium for an offshore bond. Say this was £500,000, the adviser took commission of 5 per cent or more, say, £25,000. Of this, £20,000 was rebated to the investor. Effectively, the investor had a bond, which cost £480,000. On an initial charge shape, only £480,000 was invested – usually in cash-type funds.

However, the bond could grow free of tax back to £500,000. The idea then was to encash the bond and start again. This was a simple scheme to use successive bond wrappers to make interest on big deposits tax-free forever.

Why has the treasury moved to limit the scheme?

Well, the final sentence of the last paragraph probably says it all. Except for small amounts of interest arising on tax-favoured isas, interest just is not supposed to be tax-free.Money laundering laws in pakistan the scheme was abusive. Not just that, but it was also being used extensively so the tax loss to the treasury will have been significant.

We know why the treasury has blocked the scheme. What might be more surprising is the idea that some life companies have welcomed the announcement. There are a variety of reasons for this but these boil down to risk, regulation and profitability.

Looking at risk first, there were different views among providers about whether the scheme worked at all. The technical analysis of the scheme is based on an interpretation not of legislation but of HMRC statement of practice SP4/97.

What SP4/97 does is to set out HMRC’s views on the correct tax treatment of commission rebates – both from the point of view of the investor as recipient and the intermediary as payer.

It is true that SP4/97 confirms the view that most recipients of rebated comm-ission on life policies will not be taxed.Money laundering laws in pakistan it also confirms tat the amount rebated will generally qualify for tax relief for the intermediary. On the face of it, the analysis that rebating commission “works” looks correct. However, this is overlooking a warning explicitly made in the text of SP4/97 itself.

Here is the text:

“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.”

When thinking about risk, the companies reluctant to get involved in taking this business looked at the scheme overall and decided that a possible interpretation of the scheme was that it involved tax avoidance – and yes, reading budget note 35 shows that HMRC appear to agree with this – more of this later.Money laundering laws in pakistan

They therefore worried that the scheme could be subject to HMRC challenge, bringing on to their heads the possibility of seriously disgruntled policyholders.

These companies went on to worry that it was not only policyholders who might be disgruntled on an HMRC challenge.

SP4/97 also explicitly states that the tax treatment of the two parties to a commission-rebating transaction can be treated separately.

This is a clear warning of the possibility that the “correct” tax analysis might treat the commission as taxable in the hands of the policyholder and also as not deductible for the intermediary. So the amount rebated could effectively be taxed on both parties.

The second reason why some life companies might have been concerned about the scheme was regulation. Life companies are in the business of long-term insurance. These policies might typically have had a duration of about a year.Money laundering laws in pakistan the company’s regulator might have something to say about a significant business stream with terrible persistency. And the regulator would not be alone.

In ireland at least, a duration of less than 12 months leads to an automatic requirement to consider whether an anti-money-laundering suspicious transaction report is required.

The mlros of companies taking a lot of this business might be expected to have to devote a lot of time either to corresponding with the relevant authorities or to documenting why they were not doing so in particular cases – probably the former given that the MLRO will not know what is behind a particular case.

As if this was not enough, the final straw for some life companies was profitability. Bond contracts are generally not priced on the basis that they are likely to last for a year and having a big proportion of very short-term policies is unlikely to be a sustainable financial model.Money laundering laws in pakistan

That is the background but what about the future? Is it now safe to promote commission-rebating if the policy is under £100,000 or on the basis that it’s still worth it as long as the policy is held for three years? What about cases already written – should promoters be waiting for a letter from an HMRC investigation unit?

Well, looking at existing cases first, I would not rule out the possibility of getting that letter. There is one clue in budget note 35. This says that the measures in the 2007 budget are a clarification of the tax treatment of rebating arrangements. HMRC is not agreeing that these ever worked in the first place.

Also, to get back to the point made above, SP4/97 explicitly says that it does not apply in cases of tax avoidance.

BN 35 says: “the legislation targets policies that are used in schemes to avoid tax on investment income.”

So not that safe, then.Money laundering laws in pakistan and there is no reassurance to be found in the fact that this is all moving on to a statutory basis. HMRC may well have a go at the scheme if it thinks the tax at stake is big enough and if it thinks it has got a good enough argument. I will not spoil things by suggesting some of the arguments it might advance.

What about promoting this scheme? There has certainly been some commentary suggesting that BN35 legitimises the scheme so we can all relax as long as we know that commission-rebating is within the parameters laid out. It is all fine as long as the premiums paid are less than £100,000 or as long as the holding period is likely to be three years or more. This is a plausible view.

However, if recommending such an approach to a client, the adviser should consider the flexibility built into the new rules. The treasury can change the premium limit at any time – so policies with lower premiums may suddenly be caught.Money laundering laws in pakistan

Likewise, the three-year holding period might suddenly be extended to something longer. New rules could easily apply to existing policies. I am sure that we have all buried the myth of no retrospection in tax but even the diehards would have to agree that changing a rule to create a future tax liability is fair game.

Clients should be warned that commission-rebating might, but might not, work. They and their advisers will also need to keep good records about amounts of commission rebated. The scheme being targeted is tax avoidance but responsibility for disclosure of taxable rebated commission rests firmly with the policyholder. By

System administrator 17 th may 2007 12:00 am