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Post Office Horizon compensation falls short
iStock_Caymia_Empty purse

Tax clawback eats into Horizon scandal settlements

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Tax barrister and campaigner Dan Neidle raised the alarm over the unfair tax treatment of compensation payments made to more than 2,000 sub-postmasters and sub-postmistresses who were wrongly prosecuted as a result of the discredited Horizon accounting system.

9th Mar 2023
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The UK’s largest and longest-running public sector technology scandal stems from unreliable software installed in sub-post office branches during the late 1999s. By the time the full extent of Horizon’s faults and the Post Office’s cover-up was untangled by courts and Parliament, more than 900 sub-postmasters had been pursued with prosecutions for theft and false accounting and claims that led to financial ruin, prison, and in some cases, suicide.

Since the Court of Appeal started setting aside the convictions in April 2021, two different compensation schemes were enhanced to cater for those who had settled without going to court and those who had been improperly convicted. The government also bowed to pressure from MPs to set up a public enquiry to investigate the full sequence of events and establish the appropriate levels of compensation.

In a letter to the House of Commons business and enterprise select committee in November, enterprise and markets minister Kevin Hollinrake reported that compensation offers worth £64m had been made to 2,135 of 2,374 eligible claimants. At that point 1,756 offers had been accepted, amounting to £44.7m with interest and after tax.

The previous July, however, the National Federation of Subpostmasters had told the Parliamentary inquiry that tax could be due on compensation and that the Post Office told recipients to seek tax advice, but did not provide any assistance beyond that. 

The issue was apparent in October, when one AccountingWEB member reported their subpostmaster client had received £50,000 in historical compensation made up of £27,800 shortfall losses, £12,500 for distress and inconvenience, and £14,000 in interest, which has already had tax deducted at 20%. “I am wondering if the £27,800 shortfall losses is taxable,” asked jonibarnes.

“I’d be surprised if [the shortfall losses are] also compensation, given the payment of £12,500,” answered Steve Ha, “but the devil will be in the detail.”

Top bracket

In a post highlighting the plight of the Horizon victims, Neidle pointed out that the larger, more recent lump-sum payments for loss of earnings were putting the recipients into the top tax bracket. A postmaster on £30,000pa would normally take home around £25,000 after tax, he explained. If they get 10 years’ worth of earnings in one payment, they would take home £170,000 rather than £250,000. Compressing the payouts into one year would cost the recipient £80,000. 

“The tax impact of the settlements on the victims has not been thought through and, as a consequence, much of the compensation will disappear in tax,” Neidle wrote.

Additional tax on interest

The historic nature of the claims added to the potential costs and complications for the Horizon victims, he continued. A large amount of the compensation is interest that can reach into six figures. The Post Office will withhold 20% of the tax due, but the remainder under higher tax rates will be payable by the victims on their self assessment return. 

“They are not being warned about this and may receive a nasty surprise. I am very concerned that some of the victims won’t obtain tax advice, won’t declare the interest on their tax return, and so could fall into default with HMRC. That would be an unconscionable outcome,” Neidle wrote.

Under the Gourley principle applied by the courts, compensation is usually designed to leave the recipient in the same after-tax position as they would have been if there had been no harm done, he explained. But the Post Office had failed to follow this principle by structuring the compensation to avoid taxation as earnings, for example as legal damages, or to increase the settlements to counteract the effects of tax.

Government should act

“I suspect most accountants would be amazed to find that the Post Office pushes vulnerable elderly people into complex settlements that are badly structured, doesn’t pay for them to get tax advice, provides them with inaccurate and even misleading statements as to the tax effect, and then doesn’t pay for them to get help with their subsequent tax return,” Neidle told AccountingWEB.

To fix the situation, Neidle called for the government to include clauses in the Finance Bill that would:

  • exempt Horizon victims from tax on compensation payments they receive
  • calculate compensation as if the exemption did not exist (to stop the Post Office using it as an excuse to reduce compensation payments)
  • deny tax relief to the Post Office on compensation for wrongdoing, as has been the case for bank compensation in the past, which would recover much of the cost of the tax exemptions for recipients.

Apart from an encouraging tweet from the business minister, there has been no visible movement on the issue from the government yet, but with the Budget a week away, Neidle was optimistic.

“I suspect most of those affected aren’t in a position to get advice – but if any of your readers are advising a postmaster with tax liability from a settlement, I would suggest holding off for as long as possible, given the hopefully high chance of a statutory exemption,” he said.

Replies (6)

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By paulwakefield1
09th Mar 2023 16:20

“I suspect most accountants would be amazed to find that the Post Office pushes vulnerable elderly people into complex settlements that are badly structured, doesn’t pay for them to get tax advice, provides them with inaccurate and even misleading statements as to the tax effect, and then doesn’t pay for them to get help with their subsequent tax return,” Neidle told AccountingWEB.

Nope. Not surprised in the least.

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Tom Herbert
By Tom Herbert
09th Mar 2023 17:54

Throw in a dash of racism...

https://www.thejusticegap.com/testimony-in-the-post-office-scandal-revea...

... and this must be up there as one of the most shameful episodes in public life in living memory.

It's a good job Fujitsu hasn't been awarded any whopping government contracts recently

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Replying to TomHerbert:
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By Hugo Fair
09th Mar 2023 23:58
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By 2TunTed
10th Mar 2023 10:16

It won't be the first time nor regrettably the last that the effort put in to defend a now completely discredited project vastly exceeded the efforts to put right the damage caused. That individual victims are then further penalised by the tax system is no surprise. It wouldn't have taken much to give the compensation a character so as not to be taxable. To not have have done so just underlines what a small minded spiteful lot were behind the settlement. Shame on them. Shame on the Post Office. and shame on all those who defended the Post Office actions against the evidence.

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By Springfield
10th Mar 2023 11:38

Just when you thought that the most shameful episode in British corporate misfeasance couldn't get any worse - it does. How did we reach a point where compensation sums were structured but the tax consequences were ignored, most likely with a shrug of the shoulders and "that's not my problem" from some overpaid, faceless civil servant?

Given the unlikely chance of these blameless sub-postmasters receiving a penny ten years ago -perhaps these payments should be treated for tax the same way as lottery winnings?

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By Ian McTernan CTA
10th Mar 2023 14:21

The sheer big headedness of the Post Office even now beggars belief. It would not have been hard to structure the whole deal to exempt most of the payments from tax entirely.

They should then have been forced to provide comprehensive tax advice as part of the settlement terms- a failure of the negotiating team for the victims.

Hopefully they will announce something in the Budget to make these specific payments exempt from tax and non-deductible by the Post Office (not that the Post Office makes any money anyway, but might claw back some tax one day).

Big thanks to Dan for highlighting the issue and campaigning to get it out into the light of day.

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