What is the Tax Status of Compensation for Financial Product Mis-Selling?

7th February 2019 By Arman Khosravi

Is compensation paid to individuals whose businesses have failed due to mis-selling of financial products subject to Income Tax? In a decision that will disappoint many victims of bank wrongdoing, the First-tier Tribunal (FTT) has answered that question in the affirmative.

The case concerned seven brothers whose property letting business had been mis-sold interest rate hedging products (IRHPs). The business subsequently failed, allegedly due to the high interest rates imposed by the IRHPs. After they lodged complaints, the relevant bank paid them basic compensation totalling almost £360,000. HM Revenue and Customs (HMRC) took the view that the payments were taxable and raised demands against the brothers, totalling over £43,000.

In challenging the demands, the brothers argued that the compensation had not been paid in respect of the business’s lost profits, but in recognition of the bank’s wrongdoing. The cause of the compensation was the mis-selling and the sums received should be viewed as non-taxable capital, rather than income.

In rejecting their appeal, however, the FTT preferred HMRC’s argument that the sums were paid by way of reimbursement for excessive expenditure by the business. The compensation arose from the carrying on of the business, while it existed, and was thus properly viewed as a post-cessation receipt, within the meaning of Section 349 of the Income Tax (Trading and Other Income) Act 2005.

Although it could be said that the sums had been paid ‘for’ the mis-selling, the bank’s wrongdoing was merely the source of the legal right to compensation, which did not include a punitive element. The payments were thus revenue receipts and constituted taxable income. The FTT also noted that the brothers’ right of action against the bank constituted an asset. In those circumstances, the compensation would have been subject to Capital Gains Tax even had it been regarded as a capital item.

Source: Concious

Latest News

Award That Requires Borrowing Made Into Court Order

17th May, 2024 By

Disagreements between separating couples all too often result in litigation that substantially reduces the assets available to them, as was illustrated by a case that recently reached the High Court. At issue was whether awards made by arbitrators in financial remedy proceedings can be made into court orders even if that would require one of the parties to borrow money. The couple had previously had a relationship lasting a few years before resuming their relationship in 2015. They had two children before separating again in 2019. Following their separation, the...

Inheritance Disputes – Costs Risks Can Be Reduced

15th May, 2024 By

Arguments about what someone promised before their death can lead to significant legal costs. However, if faced with a claim against the estate, there may be steps the beneficiaries or executors can take to reduce the risks, as a recent High Court case illustrated. A man had left a farmhouse and agricultural land in Cornwall to his wife, with whom he had also jointly owned a neighbouring area of land. After his death, one of the couple's daughters and her husband claimed that he had told them he wanted them...

Share Rounding Error Does Not Prevent CGT Relief

13th May, 2024 By

There are often very specific rules that must be complied with in order to claim tax reliefs, but if a small mistake arises, the courts may be able to provide assistance. In a recent case, the First-tier Tribunal (FTT) found that an investor was entitled to Entrepreneurs' Relief on the disposal of his shares in a company, despite owning one share fewer than he needed to qualify for it. The investor had agreed to purchase 5 per cent of the shares in the company for £500,000. He wished to own...

Wife Entitled to Maintenance Until Sale of Family Home

10th May, 2024 By

When divorcing couples disagree on how assets should be divided, the courts will seek to arrive at a fair outcome for both parties. In deciding how the proceeds of sale of a former couple's home should be apportioned, the Family Court agreed with the wife that she should receive maintenance payments until the sale took place. The couple had married in 2006. Following a brief separation, they had reconciled for two years before finally separating in 2022. The husband and wife both contended that they should be entitled to about...