Potential tax windfall after mis-sold insurance policies

HM Revenue & Customs (HMRC) has published advice on paying tax on interest from payment protection insurance (PPI) compensation payments, targeting higher rate taxpayers in particular. Britain’s banks will pay out about £7bn or more for mis-selling the loan insurance, and have been lining up in recent days to raise how much money they are setting aside for payouts as claims flood in. HSBC said this week it was making an extra $468m provision. Royal Bank of Scotland, Barclays and Lloyds have also lifted the amount they are setting aside.

The Financial Services Authority has been encouraging investors to make a claim and said last week that lenders have so far paid out £3bn. The compensation includes a sum paid as premiums and interest on those premiums which could have been earned elsewhere.

“It is on the interest portion where the hundreds of millions of pounds of potential tax windfall could come from for the government,” said Chas Roy-Chowdhury, head of taxation at ACCA. “As the compensation claims are happening on an industrial scale, the government should change the law.” A HMRC spokesman said there was a longstanding rule that interest on compensation was taxable, adding tax would have been due in any case had people put their money into alternative investments such savings accounts. It is unclear how many people took out PPI products with estimates ranging from many thousands to millions.