In Darren Wilkinson v HMRC [2020] TC7861 the First Tier Tax Tribunal (FTT) considered the tax treatment of compensation paid by Barclays Bank PLC as a result of the mis-selling of interest rate swaps.
HMRC disputed the tax treatment of a sum of £466,306.69 (the 'Compensation') which was paid by Barclays Bank to the Appellant by way of compensation for the mis-selling of an interest rate swap (the 'Swap').
The Compensation was made up of two elements:
(1) £384,837.07, which was quantified by reference to the difference between:
(a) the sums paid by the Appellant to Barclays under the terms of the Swap; and
(b) the sums which the Appellant would have paid to Barclays under the terms of an alternative interest rate hedging product, (the 'Basic Redress Element'); and
(2) £81,469.62, which was quantified by reference to an amount equal to interest at 8% per annum on the Basic Redress Element, and which was paid subject to the deduction of income tax at the basic rate (the 'Interest Element').
- HMRC's submitted that the Basic Redress Element was a receipt of the Appellant’s UK property business and that it is therefore subject to income tax pursuant to Sections 268 and 269(1) of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”), whilst the Interest Element was interest and is therefore subject to income tax as such pursuant to Section 369 of the ITTOIA.
- The Appellant appealed against HMRC's decision, he contended that the entire Compensation was a capital receipt in the hands of the Appellant.
The FTT reviewed the facts, and also that the FTT had previously considered a question which involved materially similar facts in Gadhavi & Others v HMRC.
- It concluded that each of the Basic Redress Element and the Interest Element is properly chargeable to income tax.
- The appeal was dismissed
Comment
This case was a lead case and it will affect many other business owners who have been affected by mis-selling by financial institutions, as such it may be subject to appeal. In the other case, V M Gadavi & others v HMRC TC6762, the FTT found that compensation received for mis-sold interest rate hedging products (IRHPs) was also taxable as a business income.
Useful guides for disputes
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Statutory Review
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External link
Darren Wilkinson v HMRC [2020] TC7861