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Chapter SAIM2075

Document Cited in Related
Vincent
Published date19 March 2016
Record NumberSAIM2075
CourtHM Revenue & Customs
IssuerHM Revenue & Customs
Compensation for financial mis-selling

FA96/S148 and ESC A99 between them exempt compensation for mis-sold personal pensions, retirement annuities and free-standing additional voluntary contributions from income tax where the necessary conditions are satisfied. The exemption extends to interest included in such payments.

But taxpayers may receive redress payments from financial services companies for mis-selling of endowments or other financial products. These may include, as well as compensation for direct financial loss, an additional element calculated as interest for the period that the investor did not have the use of the funds. If this ‘enhancement element’ constitutes interest, it will be taxable under ITTOIA05/S369.

The general principles outlined at SAIM2030 onwards will apply in deciding whether an enhancement payment is interest. It is highly likely to be interest if all the following conditions are satisfied.

  • The payment is made under a legal obligation. In practice it is unlikely that any payment made in settlement of a claim for mis-selling will be voluntary since the redress is given in consideration of the complainant giving up a right of action for compensation.
  • The enhancement element is distinguishable from the overall redress of which it forms part and is calculated by reference to a principal amount or amounts representing the sum(s) invested in the financial product.
  • The enhancement element is calculated by time and represents a commercial rate of return for the period the customer was deprived of funds as a result of the mis-selling.
Example 1

Edward bought an endowment policy from his bank to support his mortgage. The performance of the investment turned out to be worse than he had been led to expect and the Financial Ombudsman Service upheld his complaint that he was mis-sold the endowment. It was treated as void from the start and the bank was therefore required to refund the premiums paid by Edward plus...

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