£100m tax bill could make Post Office insolventby
Post Office may owe £100m in tax after incorrectly deducting compensation payments to subpostmasters in the Horizon scandal.
The report by Dan Neidle analyses the financial statements of the Post Office from 2018/19 to 2022/23 with some shocking conclusions drawn, including a potential £100m+ in underpaid tax which could lead the Post Office into voluntary insolvency.
In the notes to the accounts, no specific contingent liability is disclosed, however reference is made (page 121 of the 2022/23 accounts) to discussions with HMRC which the directors accept could be material: “As at the balance sheet date the company was engaged in discussions with HMRC regarding potential taxation liabilities that could arise in relation to past events but for which no liability has been recognised…
“While the directors recognise that an adverse outcome could be material, they are currently unable to determine whether the outcome of the discussions would have a material adverse impact on the consolidated position of the group and are unlikely to be able to do so until the discussions with HMRC are substantially concluded.”
Further analysis of the last 10 years of Post Office’s accounts by Tax Policy Associate’s “team of eminent tax and accounting experts” strongly suggests that the past events in question relate to the treatment of compensation payments made to subpostmasters – essentially that these have been incorrectly deducted.
Compensation payments not deductible
Corporation Tax Act 2009 section 54 is clear that deductions are only allowed to reduce taxable profit if they are wholly and exclusively for the purposes of trade. Whether the Post Office knowingly incorrectly prosecuted the thousands of subpostmasters who have since received compensation is a matter to be decided by the ongoing investigation. It does seem likely, though, that even if the false accusations and subsequent cover-up were not deliberate they were outside the scope of the nature of trade.
The compensation – as well as other legal fees and penalties associated with the scandal – are highly unlikely to qualify as deductible for tax.
Several highly respected tax experts have agreed with Neidle’s conclusion, including award-winning corporate tax adviser Heather Self, who is credited in the report for providing technical expertise.
Case law supports the view that the compensation payments in this case were not related to trade. Parallels can be drawn with the 1906 House of Lords ruling in Strong & Co vs Woodifield where a customer sleeping in the inn owned and managed by the appellants was injured by a falling chimney. The £1,490 paid in compensation to the customer was not tax deductible, according to the Lords present, as it was incurred due to the appellant’s lapse in maintenance of their property, not a trading loss.
More recently the upper tribunal decided that energy provider Scottish Power should not be permitted to deduct compensation paid to customers who had been mis-sold energy.
There are some unanswered questions, which means this report cannot be relied on (and nor does it purport to be) as 100% correct at this stage. The Post Office could try to claim that the compensation payments were incurred wholly and exclusively for the purposes of trade, but it seems unlikely.
As Neidle puts it in his report: “At this point we cannot say with certainty why the Post Office falsely accused 4,000+ postmasters of theft, but we can be sure it was not for any bona fide purpose of its trade.”
Government bail-out on the horizon?
The total amount deducted over the five years since compensation payments began is £934m according to the Post Office’s accounts from 2018/19 to 2021/22. In his report, Neidle calculates the impact of reversing out these payments from the taxable profit, taking into account relief for considerable available losses brought forward.
The result is an estimated amount of over £100m which the Post Office may have to pay back. There could also be penalties added to that, reaching up to 30% (or less if the Post Office has come forward to HMRC and made a “prompted” disclosure).
This could have catastrophic consequences for the company, with the BBC reporting that the Post Office risks insolvency if it has to repay the shortfall. One can only imagine the public outcry that would ensue if the government stepped in to bail out the Post Office. Feel free to drop your suggestions into the comments for who might play Rishi Sunak and/or Jeremy Hunt in the ITV sequel.
More to come out
There is evidence to suggest that as well as unlawfully deducting compensation payments from taxable profits the Post Office may have received funding from the government that was wrongly omitted from its taxable profits. There are also questions raised in the report over the deductibility of certain legal fees.
Speaking to AccountingWEB, Neidle said: “The Horizon scandal raises a host of questions as to the Post Office’s tax and accounting.
What happened to the “theft losses” that weren’t actually losses at all – did they take deductions? What happened to the “shortfalls” they forced postmasters to repay – did they book as income?
Can they justify having claimed deductions for all the expenses of the prosecutions, and subsequent legal cover-ups?
And how can they justify taking a deduction for paying compensation for illegal acts?
It doesn’t look like the Post Office has spent five minutes considering any of this.”
HMRC is unable to comment on identifiable taxpayers. Speaking to AccountingWEB, an HMRC spokesperson said: “We collect the tax due under the law, creating a level playing field for everyone and funding public services.”
The irony of this latest development has not been missed within the accounting and tax communities – there is some satisfaction to be found in the idea of the Post Office being forced to repay amounts it has (allegedly) fraudulently stolen from HMRC, having accused over 4,000 innocent postmasters of stealing from it.
As tax expert and former tax inspector, Anthony Monger commented on LinkedIn: “What irony! After accusing all those innocent people of fraud, they commit tax fraud!”
Don’t forget Dan Neidle is headlining the Festival of Accounting & Bookkeeping (FAB24) on 13–14 March 2024. Book your FREE ticket today!
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Consulting Tax Editor for AccountingWEB.
I have spent the last 10 years teaching the accountants of the future, mainly ICAEW advanced level corporate reporting. I also cover tax news and write and edit tax updates for other publishers including PTP Limited.