Victims Of UK Financial Mis-Selling Face Tax Hit On Compensation

by Robert Lee, Tax-News.com, London

24 August 2004

Thousands of Britons who have received compensation as a result of financial mis-selling have been warned that they may be liable for tax on their payments.

In its latest monthly Tax Bulletin, the Inland Revenue, citing examples of case law, has claimed that any payment in excess of a refunded premium may be deemed as interest and is therefore taxable under the relevant Act.

"We consider there can be little doubt that the additional payment is interest,” the Revenue stated, adding:

“It is calculated by reference to a sum of money which the investor is entitled to be repaid, and compensates him or her for being deprived of the use of that money."

The Revenue’s interpretation has been condemned by the accounting profession, which has warned that most taxpayers are unaware they may be liable for tax on their compensation payouts and could potentially face penalties.

“What (the Inland Revenue) is saying is unacceptable,” Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, was quoted by the Daily Telegraph as observing.

“It is taking advantage of people who have already suffered. Also, it may push lower earners into a 40% tax bracket, especially if the award was in the region of, say, £10,000. The Government needs to step in and stop this pit-bull approach," he announced.

The tax take for the Treasury, however, could potentially be very substantial. The Financial Services Authority estimates that almost £1 billion in compensation has been paid to 600,000 victims of endowment mis-selling alone.

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