HMRC outlines tax on interest rate redress
The Revenue has outlined the tax position of interest rate hedging product redress payments.
31 May was the deadline for those claiming redress to 'opt in' to the scheme.
According to the Financial Conduct Authority (FCA), the banks have now sent 16,000 redress determinations to customers, 13,500 of which include a cash redress offer and 2,500 confirm that the IRHP sale complied with rules or that the customer suffered no loss.
To date, 8,000 customers have accepted a redress offer and £1.2bn has been paid out.
The scheme started after the then Financial Services Authority (FSA) found that 90% of interest rate hedging products (IRHPs) could have been mis-sold. More than 30,000 cases were reviewed by the FCA to assess whether they may be eligible for compensation by banks such as HSBC, Lloyds, RBS and Barclays.
Redress payments need to be accounted for within tax returns. The full payment is taxable for individuals, companies and partnerships as tax relief will have been claimed for the payments as an allowable business deduction.
Therefore the payment should be treated as business income and should be reflected in the business accounts.
The interest element should be treated as taxable as interest, in the year it was received. The Revenue also said it should be showed as a loan relationship rather than as trading income.
Depending on the circumstances, the bank may deduct tax from the payment:
- For individuals, the bank will take basic rate tax from compensatory interest element of the payment. You should credit any tax deducted from the interest element against any tax you pay for tax year or accounting period in which the payment is received
- Company or partnership: The bank will not take any tax from the redress element of the payment
HMRC added that banks will be asking for the majority of redress payments as a single amount. This should then be accounted for in the tax return for the tax year of the accounting period, in which the payment was made.
In cases where the bank is paying you or your client in instalments, this should be included on each tax return for the year or accounting period it was received.
The tax department also gave some guidance for those completing self assessment or corporation tax returns.
Account for the payment as follows, according to the guide:
- Basic redress and consequential losses: Payment should be shown as income in the section of the return where the product costs were originally deducted
- Interest element: Interest receivable
A higher tax rate may be payable and the bank may also have taken this into consideration when working out consequential loss.
There are some cases where the tax treatment will differ i.e. if your or your client's business has stopped trading and the Revenue advised you might want to seek advice with this.
If the treatment differs, then the payment isn't taxable as income and could be subject to capital gains or corporation tax.
The FCA identified failings in the way some banks sold IRHP to businesses taking out business loans, which were intended to offer protection against rising interest rates.
As a result the banks involved have reviewed their sales since 2001 and some customers are entitled to redress payments payable under a process supervised by the FCA.
Banks have calculated the payment based on their analysis of the sales process, which can be made up of three elements:
- Basic redress - this represents the difference between the actual payments made by you based on the mis-sold product and the payments that you would have made without the product
- Compensatory interest - at 8% per year is applied to the basic redress, plus, in certain circumstances, to consequential losses
- Consequential losses - losses that you have suffered due to not having the use of the money that would otherwise have been available to you
Interest rate hedging product specialist Daniel Hall, from All Square Treasury said that now the FCA Review Process is approaching the vast majority of businesses will have received their redress outcome letter from their bank.
"The fortunate ones, those receiving a full tear up or alternative product – cap, will need to be aware of the tax implications of the redress offer before accepting.
"Those unfortunate ones, no redress or alternative product – other, may want to think about challenging the bank’s decision as there is a clearly defined appeal process that they can use," he added.