Tax sting in the PPI refund tale

As predicted by Rebecca Benneyworth last week, the tax treatment of awards for mis-sold payment protection insurance (PPI) is causing trouble for accountants during self assessment season.

The actual rules HMRC applies are reasonably straightforward: if a taxpayer’s claim for compensation is upheld, they will get a refund of premiums paid, the interest they have paid on the premium if it was added to their loan, and simple interest at 8%.

While the principle is to return the claimant to the position they would have been in if they had never taken out the policy, the 8% interest is taxable and must be declared to HMRC or included in a self assessment tax return. The term “straightforward” should perhaps be qualified, as several sections of the Revenue’s savings and investment manual are devoted to how to deal with interest on compensation payments from different kinds of institution (now thankfully standardised by the Finance Act 2013). 

As Benneyworth mentioned, PPI interest is a potential trap for the unwary at self assessment time as...

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Comments

PPI interest

SE | | Permalink

Is the 8% paid to the claimant gross?

ajudes's picture

Do banks have an obligation to deduct interest at basic rate?

ajudes | | Permalink

If the payment is made net only higher rate taxpayers should have to pay additional tax on the PPI interest.

Hi

DavidThrelfall | | Permalink

Hi

From my personal experience of several PPI claims that I made against loan companies and credit card companies most have paid the interest at 8% gross without deduction of 20% tax. Only RBS deducted the tax at basic rate.

I declared all interest on my tax return received from PPI claims.

 

Regards

 

David

PPI premium

MartinGatehouse | | Permalink

if the premium was tax deductible, i take it the refund of the premium (not as compensation) is taxable? 

PPI Interest

nickselectaccounting | | Permalink

Good Afternoon All, 

I noticed this a while ago and found that pre-warning the client in the event of any PPI claim prior to the claim succeeding really helped, so that they did not spend all of the money!!

Note it does not stop with PPI. . .  Interest can be paid out on other forms of compensation as there is an Interest element to other forms of compensation. . 

 

Regards

Nick

PPI interest

jjaccounts | | Permalink

I have a client with 3 claims in 2012/13.  I had information that showed they were all taxed at the basic rate.  As my client had not used all her tax free allowances she was able to claim the tax back, so the declaration of the interest received on these claims is important. 

PPI Interest

RikB1314 | | Permalink

I have a client who I think will be affected, but is away on business from now to beyond the filing date (I am filing in his absence). I very much doubt he will have the info on the reclaim with him (splitting the premium and interest) so what are my options? I intend to just go ahead with the info I have gathered thus far.......can I amend the self assessment return later???

ppi interest

Guardone | | Permalink

Having just read this article, I was unaware that additional interest was paid. A client likely to have had a loan with ppi has just confirmed thet he did receive the repayment, a couple of years ago. Possibly this was before last year which can still be amended. He no longer has the paperwork. I intend to declare on the current return, my estimate of the interest, explain we dont know which year it was for, and let them tax it currently. If any significant variations come to my notice I will amend accordingly. My estimate is £100 interest, so it is not worth anyone's time in making changes, but we are doing our best, and the revenue seem so understaffed any sensible Inspector should accept the situation.

PPI / Derivatives

gcassidy1986 | | Permalink

Points made are interesting, and where the 8% interest is received it is obviously taxed in the year of receipt, whether it relates to PPI or missold derivatives where the charges are reimbursed.

In the latter case, HMRC seem reluctant to comment as to whether the repayment of derivative charges are to be taxed in the year of receipt, or taken back to the year of the relevant charge, and the tax for that year recalculated.

In an individual case, where derivative charges for six years were reimbursed together with interest, HMRC informed us that the derivative reimbursement element was too complicated for them to give a simple answer, and that they would await submission of a self assessment return and address the issue at that time.

The inspector manuals (rather cheekily!) advises the inspector not to query the treatment if the practicioner includes all reimbursements, including interest, in the tax year of receipt.

Caber Feidh's picture

Interest received on legal costs

Caber Feidh | | Permalink

Nickselectaccounting drew attention to the tax due on the interest on forms of compensation other than PPI.

The successful party in a civil legal dispute will normally recover some of his or her costs from the losing party, either by agreement between the parties or following a decision by a judge. These recovered costs normally accrue interest at 8% over the period from the date of the Court Order granting the right to those costs until the date of payment. However, the amount of the recovered costs is usually only about 60% to 75% of the actual costs that have been incurred. Consequently the recovered costs plus interest are usually less than the actual costs.

Can the interest on the costs be offset against the shortfall in the recovered costs so that no tax will be due? And will there be a difference between private individuals and companies?

Wrong way to calculate it

joro2801 | | Permalink

My other half got caught by this and when I saw the tax demand my first instinct was "they're having a laugh" at the idea he had concealed capital of around £100k to generate that amount of interest.

But the problem is that the way the compensation is calculated is benefiting the banks more than the claimant.

If the PPI repayment was treated as an overpayment on the loan (which in my experience is how such things were treated many years ago) and the loan was recalculated on that basis, the claimant would receive the benefit of interest at the same rate as on the loan (by way of a reduction in the loan interest charged) - and instead of receiving a refund, the loan balance would reduce.  And if the entire PPI premium had been added on to the amount borrowed, as is most common, the loan would have to be recalculated on just the original amount borrowed.

The problem then is that if interest on the loan had been treated as tax relievable it would affect submitted tax returns and additional tax would be payable.