Tax and the mis-selling saga
HMRC have published guidance on the tax treatment of compensation received by companies and other businesses in respect of mis-sold interest rate hedging products. The main purpose of the article is to raise awareness that such receipts are usually taxable.
The redress can be made up of three elements:
- basic redress
- compensatory interest
- consequential losses.
The basic redress is the difference between the actual payments made based on the mis-sold product and the payments that would have been made without the product.
Compensatory gross interest of 8% per year is then applied to the basic redress.
Consequential losses are losses suffered due to not having the use of the money that would otherwise have been available. In certain circumstances compensatory interest is also applied to these consequential losses.
'The full redress payment is generally taxable for individuals, companies and partnerships. This is because you will have claimed tax relief for the payments as an allowable business deduction. So the payment should be treated as business income and you should reflect it in the business accounts.
You should treat the interest element as taxable as interest in the year you received it and show it as loan relationship income rather than as trading income.
Depending on your circumstances the bank may deduct tax from the payment.
Banks will be paying most redress payments as a single amount. You should account for this in the tax return for the tax year or accounting period in which the payment was made. You do not need to amend your previous years' tax returns.
If your bank is paying you in instalments you should include each one on your tax return for the tax year or accounting period you received it in.'
Whilst the above treatment will cover many standard business transactions HMRC acknowledge that there may be certain circumstances where the tax treatment of the payment could be different and even suggest that in fact it could be taxable as a chargeable gain. The precise guidance here is not clear and therefore if you do receive any of these types of compensation payments and are uncertain as to the correct reporting and tax treatment in your circumstances please do contact us for further assistance and information.