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Excessive credit card penalties and tax

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29th Jul 2005
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Credit card companies have been warned by the Office of Fair Trading that their late payment penalties are excessive and do not reflect the true costs banks incur. This follows the Treasury review of banks and their charging systems reported back in October 2004 https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=132594

The OFT are threatening the card issuers with enforcement action to protect consumers if undertakings are not given on fees or otherwise address its concerns.

For tax purposes, are these late payment penalties an allowable deduction? It depends on who is the cardholder, and who forced the late payment error in the first place.

Sole traders and partners will often use private credit cards for business expenditure. Those with cash flow problems will use credit cards as an expensive, but often-essential source of business borrowing. Penalties will arise on late payments to such credit cards
Normally under the 'wholly and necessarily' rule of s.74 ICTA 1988, such expenditure will be allowable under Self Assessment. Apportionment of the charges will be necessary if the card borrowing is made up of a mix of private and business expenditure. It may well be necessary to apportion this by looking at each separate transaction.
A useful case concerning deduction of interest charges is Silk v Fletcher (SpC239/00), and its follow up that looks at the computation of disallowable amounts. The HMRC Business Income Manual considers interest from para. BIM45650 on.

Companies do not normally suffer from late payment charges on company credit cards, as directors should sensibly have set up direct debits, as above. Credit card interest will fall into the loan relationship rules, and generally be a straight trading deduction.

Penalties are more likely to affect directors and employees personally, as a result of using personal credit cards for business expenses. It is then up to them to make a formal expense claim from their employer.

If the employer is late in meeting the expense claim, an employee can find himself facing a late payment penalty. What action can an employee take in these circumstances?

1. The obvious one is to seek reimbursement by the employer, but the problem is that the employer is then making a payment for something that is the pecuniary liability of the employee. This would make the payment taxable as earnings under normal circumstances.

These are not normal circumstances; employers do not normally make a habit of borrowing from employees. In this situation, the re-imbursed charge should be treated as a 'compensation' payment, and tax and NIC free. This practice is not tested, but forms a logical follow on after the Inland Revenue conceded back in 2003, that in situations where an employer makes a salary payment late, any re-imbursed bank charges should be so treated.

2. The alternative action is in the case where the employee is not re-imbursed by the employer. A claim would have to be made under s.336 ITEPA 'wholly, necessarily and exclusively'. Given the cost v. benefits of making a claim for £25 or less, there is never going to be any mileage in attempting such a claim.

Nichola Ross Martin

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By SimonP
03rd Aug 2005 10:38

Interest as a deduction - that hasn't been my experience
"Credit card interest will fall into the loan relationship rules, and generally be a straight trading deduction."

Now that is very interesting.

It has been my understanding that such interest is always disallowed as the IR take the view that credit cards are NOT loans due to the fluctuating nature of the balances, which is not a view that I agree with.

Many businesses use credit cards (a) for convenience and (b) because there may not be sufficient funds in the bank account. To my way of thinking, (b) is an alternative funding method and quite clearly a loan to the business and any interest ought to be deductible where business purchases are involved.

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