V M Gadavi & others v HMRC TC6762, the FTT found that compensation received for mis-sold interest rate hedging products (IRHPs) was taxable as a business income.

  • Mr Gadhavi and six of his family members ran a family property investment company.
  • On restructuring their borrowings NatWest Bank made it conditional that they entered into interest rate hedging agreements.
  • There was a fall in the property market and a fall in interest rates, the family found that they were locked into very expensive interest rates, they had to dispose of their business in order to repay their borrowings.
  • The FCA identified mis-selling failings in nine banks, including NatWest and banks agreed pay redress to large numbers of unsophisticated customers including the Appellants.
  • HMRC treated the compensation amounts as taxable as income.
  • The Appellants appealed to the FTT, they claimed that the compensation was capital and not taxable.

The FTT in referring to the test set out by Diplock LJ in London & Thames Haven Oil Wharves Ltd v Attwooll [1967] CH 772 the judge considered, firstly whether the compensation paid because the trader has failed to receive a sum of money. From further case law she ascertained that the same principle applies to the payment of a sum of money to make up for a liability to pay an excessive revenue expense, she considered that answer was affirmative.

She then asked ‘If the trader had in fact received the sum of money for which he has had compensation (because he did not receive it) would that sum of money have been credited to the trading profits?

She found that the appellants had claimed tax relief on the excessive costs of interest hedging via their business accounts. The amounts of compensation were: (1) “Refund of net amounts payable by you on original IRHP…Please note: Payment includes early exit costs…” ie the basic redress on a “full tear up” basis (2) “Refund of bank fees and charges” (3) “Interest at 8% a year simple”. Tax at 20% had been deducted from the interest payment.

The FTT decided that the redress payments received by the Appellants as compensation for the mis-selling of the IRHPs was a revenue receipt of their property business, subject to income tax as a post-cessation receipt of that business, but subject to a credit for the basic rate tax deducted at source on the interest element.

Comment

From the judgement it appears that there are a large number of further cases listed before the tribunal on this topic. A decision by the FTT does not set any precedent and so in theory other arguments could apply.

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External links

V M Gadavi & other v HMRC TC6762

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