TaxAdministrationFears of £1bn tax bill for compensation unfounded

Fears of £1bn tax bill for compensation unfounded

A row over the taxation of compensation payments heated up this week as the Inland Revenue moved to dispel speculation that it would pursue life companies for £1bn of unpaid tax.

Link: Tax shock awaits compensation winners

The Revenue rejected industry concerns that its recent clarification of the taxation of interest on compensation, received as a result of financial mis-selling, including endowment policies, would result in an attack on the companies responsible for handing out the reparations.

PricewaterhouseCoopers tax partner, John Whiting said he expected the Revenue to go after the handful of life companies for the £1bn of estimated tax that could be recouped, instead of the taxpayers who received compensation.

But the Revenue moved to rule out the possibility. ‘Payments of interest made as part of a compensation award will normally be paid net of income tax,’ a spokesman for the Revenue said. ‘This reflects the long-standing legislative requirement for companies to deduct tax at source from payments of yearly interest.’

Despite this, tax experts have called on the government to treat the compensation received for financial mis-selling in the same way as it does for pensions mis-selling, where no tax is charged on the payment.

‘I think it should be the same as pensions mis-selling,’ said Whiting. He said if 600,000 taxpayers who had received compensation for mis-selling were asked if they were aware tax was due, ‘599,999 would say “no” and the other would say “what’s tax?”‘

But the Revenue is adamant that nothing has changed, despite a clarification in a recent Tax Bulletin.

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