A year ago one of the initiatives of the Law Society's financial and investment services working party (FISS) was to arrange for the publication of fortnightly articles in the Gazette.

During 1997 the articles covered most of the practical aspects of the financial and investment services in practice, and have been well received.The intention in 1998 is for the articles to be driven more by current news items and issues.

The role of the new Financial Services Authority vis a vis the profession will become clear, and the opportunities offered by the new regulatory regime will begin to appear.

Solicitors should be well placed as regulation tightens in the financial services industry.Taxation of commissionsMeanwhile, we can begin the year gently with SP 4/97.

This is the new Inland Revenue statement of practice on the taxation of commissions, cashbacks and discounts published in 27 November 1997.

Copies are available from the public enquiry room, west wing, Somerset House, Strand, London, WC2R 1LB; telephone 0171 438 6420/6.

It entirely replaces SP 5/95, which caused so much confusion, and will be applied in a ll open cases by the Inland Revenue.The press release accompanying SP 4/97 stated optimistically that most taxpayers -- as ordinary retail customers -- would have no tax to pay on cashbacks, discounts or rebated commission.

The statement runs to 45 paragraphs over ten pages, so the aspects highlighted here are no substitute for reading the real thing.Schedule D: cases I & II -- receiptsSolicitors may receive commission incidentally in carrying on their work, or they may receive it on a sufficiently commercial regular and organised basis for it to amount to a trade or profession of its own.

In either case the commission will be a receipt for schedule D purposes.Suppose the commission is passed directly to the client -- perhaps the product is enhanced by the commission on instructions given to the provider, or regular premiums are reduced by the amount of commission.

If the solicitor had an enforceable right to the commission it remains a taxable receipt by the solicitor.On the other hand, if the solicitor neither receives commission nor has any right to it, then there can be no taxable receipt.

For example, there could be a discounted purchase price with no commission involved, as opposed to a purchase price discounted by commission.Cases I & II -- deductionsWhat is the position when the solicitor has a taxable receipt but passes on the commission to the client? It may be set against costs, simply paid to the client, or foregone in some other way.Such commission passed on to a client, or foregone, as an inducement to enter into a transaction, is deductible for tax purposes if it is laid out wholly and exclusively for the purpose of the solicitors' profession.

That statutory test is very likely to be satisfied, says the Inland Revenue with perhaps unnecessary caution, if the client required the commission to be passed on as a condition of entering into the transaction or if the transaction was one between independent parties acting at arm's length.For practical purposes, the answer for the solicitor must surely be to agree the destination of any commission with the client by appropriately worded terms of business before it is earned.

These days that is nothing more than good practice, besides complying with practice rule 15.Incidentally, satisfying the same statutory test avoids the need to include the commission or rebate in a tax return.Case VI -- receipts and deductionsIf a case VI receipt arises as a consideration for introducing a client to a supplier of services, it is deductible for tax purposes where some or all is passed on to the client, either where it was a condition of entering into the transaction or where for some other reason the payment is necessary to earn the commission.

Again, the position is probably best covered by prior agreement with the client.It is convenient to digress briefly here to comment that solicitors may be rewarded for introducing a client to another supplier of services, and should almost invariably seek to be so rewarded for the benefit of the client.

Commission received is, of course, subject to practice rule 10.

It is surprising how often solicitors refer both the business and the client with no thought either of reward or continuing contact with the client.

That cannot be in the best interests of the client.Personal commissionStrictly, commission earned for business introduced in the course of a trade or profession is a taxable business receipt even where the business is paid for by the trader or professional person.By way of concession, so much of that commission may be excluded from taxable profits 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 client buying the same product or services.

Solicitors would normally pass on the whole of such commission, in one way or another, until it exceeded normal costs, or pass on commission as provided in normal terms of business.Schedule ESometimes an employee will be paid partly by commission in respect of investments or services sold to clients.

That commission is prima facie taxable, but it may be passed on to the client at the instigation of the employee or the employer.

It is then deductible if the employee is obliged to expend the sum wholly, exclusively and necessarily in performing the duties of employment.ConclusionThe concern of the Inland Revenue with these matters varies from district to district, but SP 4/97 is really compulsory, if not compulsive, reading for all solicitors offering financial and investment services.