HMRC Help and Support
Advice for the tax treatment of redress payments
Having received a redress payment from your bank HMRC wants to offer youguidance tomake sure you correctly include this payment in your tax returnas we will be checking business returns.
Why have you received a redress payment?
The redress payments are due because certain products, often associated with loans, were sold to bank customers with the understanding that they would be protected if interest rates fluctuated. However, this was not the case and customers lost money even when interest rates went down.Because of this the regulators decided that this was a breach of financial regulations and that compensation (redress) would be due for overpayments under a process supervised by the Financial Conduct Authority (FCA).
What happens next?
The redress payments will usually be paid out as a single payment taxable in the year it is received, so there will be no need to open up previous years’ returns. The payment is taxable because you would have previously claimed tax relief for the interest payments asan allowable business deduction and so when the redress payments are made to you they must be treated as a business income.
There are three elements of redress payments:
- Basic redress represents the difference between the actual payments made by a customer on the mis-sold product and the payments the customer would have made if the regulations had not been breached;
- Interest at 8% per year is applied to the basic redress, plus in certain circumstances to either additional borrowing costs incurred, or to lost interest on income;
- Consequential losses can take a number of different forms and includes items such as loss of profits because of unavailable funds, due to the mis-selling, in order to generate a profit or interest or additional bank charges incurred due to the lack of available funds.
The banks will deduct income tax at the basic rate from payments of compensatory interest and advise you of the amount deducted. The full amount of the redress payment will generally be taxable but the tax deducted from the interest element will be available as a credit against the tax on your assessable income for the year in which the payment is made.
There are certain circumstances in which your tax treatment may be different. These include when your business has ceased trading, where the product was associated with a non-business loan or the product was a hedging product and its fair value was recognised in your accounts.
Where the payment you receive in the current year is not assessable to corporation tax or income tax, it may be subject to capital gains tax or with companies, corporation tax on chargeable gains. If so the normal capital gains tax rules will apply.
We hope that you have found this information useful and we have helped to clarify the situation. For more information on this and other matters please go to the HMRC website at