The House of Commons has published a letter from the Treasury Committee Chair, Andrew Tyrie, to Chancellor of the Exchequer, George Osborne.  The letter raises questions on the tax deductibility of fines imposed by regulators on banks.

In the letter, Mr Tyrie explains (amongst other things) that, payments required by UK and foreign regulators as a result of misconduct or misselling should not be deductible for UK corporation tax purposes.  He considers that the July 2015 budget was a “step in the right direction,” however, seeks clarification on the following points:

  • That all fines imposed on banks by regulators other than those excluded by section 133D of the Corporation Tax Act 2009 (as amended), cannot be deemed to be ‘compensatory’ and therefore deductible under current tax legislation, whether they are made to individual customers, to state authorities or to any other bodies.  Mr Tyrie explains that there seems to be some doubt about this as it appears HMRC’s Business Income Manual 42515 suggests that payments made to regulators, rather than customers, as a result of a fine may be deductible in some circumstances.  The letter suggests that this is unacceptable and that it is important taxpayers are not required to bear part of the burden imposed by the FCA or overseas regulators.
  • That the costs banks incur in producing section 166 reports for the FCA should be tax deductible, where the reports do not result in a referral to the FCA’s enforcement department.  The letters explains that these costs can be a significant burden on banks and other institutions, often where there is no proven misconduct.   Mr Tyrie states that the tax position is still unclear and seeks clarification on this point.
  • Whether agreements reached by UK banks with foreign regulatory authorities can, in certain circumstances, be structured as to permit UK tax deductibility.  Mr Tyrie explains that, if this is true, it would appear to breach the spirit of UK tax law that punitive fines are not deductible, as these agreements are an alternative to a court-imposed fine.