HM Revenue & Customs (HMRC) has issued guidance on how redress payments made to businesses that have been mis-sold interest rate hedging products should be accounted for on tax returns.
The complex products, including swaps, caps and collars, were typically sold by banks to small and medium-sized enterprises (SMEs) alongside business loans as a way to reduce the risk of exposure to interest rate fluctuations.
But with many SMEs facing substantial exit fees or non-competitive rates to remain in the products – to the point where the costs associated with the products may have threatened business viability – 11 banks agreed in 2012 to compensate businesses mis-sold products including swaps, caps and collars.
They have identified customers who may have been affected and have been inviting them to have their products and arrangements independently reviewed.
According to the latest figures from the Financial Conduct Authority (FCA), 19,000 customers had been invited to undergo a review up to the end of June 2014. More than 7,500 customers have so far accepted redress offers from the banks, which to date have paid out £1.2 billion.
In its new guidance, issued on 25 July, HMRC said: “The full redress payment is generally taxable for individuals, companies and partnerships. This is because you will have claimed tax relief for the payments as an allowable business deduction. So the payment should be treated as business income and you should reflect it in the business accounts.”
As well as more detailed guidance on how payments should be accounted for in tax returns, HMRC said: “There are certain circumstances where the tax treatment of the payment will be different and you may want to seek advice. For example:
- your business has stopped trading
- the product was for a non-business loan
- the product was a hedging product and its fair value was recognised in your accounts.
“If this applies then the payment is not taxable as income. It could be subject to either capital gains tax for individuals or corporation tax on chargeable gains for companies.”
Link: The HMRC guidance