SAIM2080 - Interest: financial mis-selling: practical considerations
Handling enquiries about compensation for financial mis-selling
A bank, building society, insurance company or other financial institution paying compensation for financial mis-selling will normally use a formula laid down by the Financial Services Ombudsman (FOS), appropriate to the facts of the case, in order to compute the amount of compensation. If the award contains an element of interest, and the payment is made by a company to an individual, tax must be deducted from the interest element under Part 15 of ITA 07 - see SAIM9000.For banks, however, such interest payments are regarded as being made in the ordinary course of the bank’s business (see BAM44050 SAIM20000), and the bank does not have to deduct tax. See SAIM9020 for more on the requirement to deduct tax.
Financial institutions will, in most cases, have developed precedents for determining how much interest (if any) is included in a compensation award where a particular formula is used to calculate it.
In practice, HMRC staff will only need to consider whether a compensation award includes interest in a limited range of circumstances.
- An institution or independent financial advisor paying compensation asks whether a particular formula for calculating the award contains an interest element. You should refer any such query to CTISA (Financial Products Team).
- A compensation payment made to a customer has tax taken off, but the customer believes that it does not contain any element of interest. You should advise the customer that deduction of tax is a matter between the person making the payment and the payee, and the customer should take up the matter with the institution concerned. You should not give any opinion on the correctness of the payer’s decision to deduct tax. You will however need to consider whether the customer has received taxable interest if he or she is liable to tax at the higher rate.
- No tax has been deducted from the payment, but either the customer asks whether it contains an interest element or, exceptionally, you have reason to believe that it does.
Where, in a case falling within the second or third bullet point, you do need to decide whether a compensation award contains an interest element, you should obtain a copy of the letter setting out how the award has been calculated, and any other relevant facts and documents, before coming to a conclusion. Because payments made by insurance companies or banks in settlement of mis-selling claims are likely to arise under a standard form of agreement, HMRC staff should not accept that a payment appearing to satisfy the conditions set out in SAIM2075 is not interest without consulting CTISA (Financial Products Team).