The investigation is being conducted by the Revenue's Enquiry Branch, the section that looks into serious cases of alleged accounts fraud or cases where the tax losses are thought to be more than pounds 100,000.
Bob Gill, Allied Dunbar's divisional director, confirmed the existence of the tax investigation, but both he and other sources close to the investigation denied strongly that there was any suspicion or evidence of malpractice.
'We have been approached to review all our tax affairs,' he said. 'The work is considerable and unravelling the detail is complex.' Some of the queries involved looking at practices that had been going on in the company for around 20 years, he added.
A spokesman for KPMG Peat Marwick, the accountancy firm called in by Allied Dunbar to prepare a report for the Inland Revenue, said that the Revenue was primarily interested in 'technical' issues and that there had been no allegations of fraud. One issue concerned the dividing line between employed and self- employed sales staff with the company, he said.
Many of Allied Dunbar's sales staff call themselves self- employed for tax purposes, even though they receive large, interest-free loans from the company in lieu of commission payments.
The Enquiry Branch investigation also covers Allied Dunbar's tax treatment of capital allowances on equipment, such as faxes and photocopiers, that the company receives from stockbrokers and market-makers as payment for placing business with them.
The Enquiry Branch was called in to investigate after the Revenue discovered the existence of these so-called 'soft commissions'. The first contacts between the company and the Enquiry Branch, based in Manchester, were made around a year ago.
Allied Dunbar responded by appointing KPMG Peat Marwick to investigate all its tax affairs.
Peat Marwick's job is to review all aspects of the company's tax affairs with a view to submitting a series of reports to the Revenue. It is believed that a number of these reports have already been sent in.
In the course of its review Peat Marwick has also looked at the payment of loans to the company's 4,500 sales staff. Interest-free loans are often paid upfront to life insurance salesmen to tide them over periods of little or no income. Sometimes these loans are not recovered in full.
Any conclusions the Revenue might reach could affect the self-employed status of the company's sales staff and could have far-reaching implications for the life insurance industry, which currently has about 75,000 self-employed sales staff.
All 400 of Allied Dunbar's managers are on a salary, but also receive part of their package from the commission earned by the sales personnel working from their branch. These are considered to be self- employed earnings.
Mr Gill, the Allied Dunbar director, said that he did not know what was behind the Revenue's interest but he thought it was seeking an interpretation of the legislation concerning the earnings of direct sales staff.
He said there was no question of any impropriety by the company and that it had not made any provisions in its accounts for extra tax liabilities.
KPMG's fees for the work might reach as much as pounds 1m.
Allied Dunbar was set up by the South African lawyer Sir Mark Weinberg in the early Seventies. Sir Mark also founded Abbey Life, but departed following an acrimonious split with one of the life office's other shareholders.
Sir Mark left Allied Dunbar in 1990 after Sir James Goldsmith launched a hostile, though ultimately unsuccessful, bid for BAT, Allied's parent company. Goldsmith's bid vehicle, Hoylake, was backed by Jacob Rothschild. Sir Mark was on the board of J Rothschild Holdings, giving him a possible conflict of interest.
When he left Allied Dunbar he took with him Mike Wilson, chief executive, and Keith Carby, managing director, to set up a new life company, J Rothschild Assurance. A substantial number of Allied Dunbar's sales staff, believed to be around 200, moved over to join the new company.Reuse content