Back in 2012, the Financial Conduct Authority (FCA) identified failings in the way some banks had sold interest rate hedging products (IRHP) to business customers. A full review began in the following May and the banks involved have contacted 20,200 affected customers.
According to the latest figures, 17,600 redress determinations have been issued to the customers involved, with 14,200 receiving a redress offer. The remaining 3,400 have been advised their IRHP sale was compliant with FCA rules. To date, 12,540 have accepted the redress offer and some £2bn has been paid in redress, including £400m to deal with consequential losses.
The nine banks involved are:
Allied Irish Bank (UK), Bank of Ireland, Barclays, Clydesdale & Yorkshire Banks, Co-operative Bank, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Santander UK.
Where HMRC has become aware of a redress payment being made to a business, a letter has been sent to the accountant acting stating:
‘We understand that your above named client may have received a taxable redress payment from their bank relating to interest rate hedging products (IRHP) and we want to ensure the amount is declared on your client’s return.
When this business income is reported, it would be helpful if you use the word ‘redress’ in the ‘any other information’ box on your client’s return in order to draw our attention to the payment. Please also enter the amount your client has received.’
A similar letter has also been sent to the business involved.
The redress payment is usually paid out as a single payment and is taxable in the year it is received.
The payment is taxable because the business would have previously claimed tax relief on the IRHP payments as an allowable business deduction against profits. Although the tax relief may have been claimed over several years, the redress payment does not become payable until the bank agrees to pay it.
Furthermore, the payment is treated as a trading rather than a capital receipt, because the initial tax relief would have been claimed in the business’s profit and loss account, with the redress payment made to put the business back in the position it would have been if the IRHP had not been missold in the first place.
In cases where the redress payment has not been declared, HMRC has opened a formal enquiry into the Tax Return covering the period during which the payment has been made. We have seen a number of enquiries launched by HMRC through the summer, which could easily have been prevented by a transparent declaration on the relevant Tax Return.
The banks are continuing to deal with unresolved cases, including businesses who have challenged their redress offers and claims for consequential losses.
If you are a business and receive such a payment, it is important to advise your accountant and to follow the advice given by HMRC about identifying the payment on your tax return, in order to prevent a formal tax enquiry.
Author: Guy Smith, Tax Investigations Manager