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Rt Hon. George Osborne, Chancellor of the Exchequer, has confirmed that payments made by banks to regulators are viewed as “a routine cost of doing business” and are therefore “generally deductible for Corporation Tax purposes”, in his response to a letter from Rt Hon. Andrew Tyre MP, Chairman of the Treasury Committee.
Chair's comments
“As long as regulatory payments are made by compliant and non-compliant alike, it is reasonable that they should be treated as a cost of doing business and therefore tax deductible. But in cases where such payments are tantamount to fines, they should not be tax deductible.”
Previous correspondence
- On 5 February 2016, the Chairman wrote to the Chancellor asking him to clarify whether banks can offset the costs of fines, and other payments they make at the behest of regulators, against their corporation tax bill.
- On 15 February 2016, the Chancellor responded.
- On 6 April 2016, the Chairman wrote back, seeking further clarification on whether banks can offset any of the payments they make to regulators, against their corporation tax bill. This letter is attached. At the time, Mr Tyrie said:
“Taxpayers appear still to be on the hook for the costs of the banks’ misconduct.
“A restriction on the tax deductibility of compensation payments to customers has been reinforced by the Finance Act 2015. This is a big step forward. But the Chancellor’s reply suggested that compensation payments to regulators could still be tax deductible. This would be unacceptable.
“‘Compensatory’ payments have in the past been held to be tax deductible. This should change. If tax law can’t be changed beyond the changes made last year, then UK regulators should ensure that any payments required from banks for misconduct are either compensation payments to customers, falling within the scope of last year’s changes, or are clearly set out as fines and not as ‘compensatory’ payments.”
Background
A general principle of tax law is that while payments which are punitive are not tax deductible, payments which are compensatory in nature are deductible.
- Last year’s Finance Bill ensured that where banks paid compensation to customers, it was no longer deductible.
- But the Chancellor’s first letter back to the Chairman suggested that some of the payments which banks make to regulators are in respect of their compliance costs and as such are expenses of doing business and are deductible for corporation tax purposes. In other words, they are compensation to regulators and thus not caught by last year’s Finance Act. This is consistent with HMRC’s Business Income Manual 42515, which says that “when a trader incurs a liability to a regulatory body on revenue account that is broadly intended to cover the regulator’s costs of performing its duties in relation to the trading activities, such costs will normally be allowable even where the trader has committed a breach of regulations”.
- The Chancellor’s second letter confirms that “payments made to regulators are generally deductible for Corporation Tax purposes. This applies to routine payments made by banks operating in the UK to regulatory authorities, to cover the cost of their supervision and oversight… This is a long-standing general position and reflects the view that regulatory payments are a routine cost of doing business, and are paid by compliant and non-compliant firms.”
- As long as regulatory payments are made by compliant and non-compliant alike, it is reasonable that they should be treated as a cost of doing business and therefore tax deductible. But if any such payments were to be due solely from the non-compliant, then they should not be tax deductible, as they would be tantamount to fines.
Further information
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