On 7 April 2016, the House of Commons Treasury Committee published an exchange of letters between Andrew Tyrie, Committee Chair, and George Osborne, Chancellor of the Exchequer, in relation to the tax deductibility of fines imposed by regulators on banks.
In his first letter (dated 5 February 2016), Mr Tyrie states that, in principle, payments imposed by regulators in the UK, and in other countries such as the US, as a result of misconduct or mis-selling, should not be deductible for corporation tax purposes and requests clarification on a number of points from Mr Osborne.
Mr Osborne responded on 15 February 2016, providing the following clarification:
- General tax treatment of compensation and fines. Financial penalties imposed by regulators are non-deductible for UK corporation tax purposes. Compensation expenditure arising from trading activity is, in principle, deductible. However, the government took steps under the Finance (No 2) Act 2015 to make compensation associated with bank misconduct and mis-selling non-deductible, and to offset the deductibility of administrative costs associated with this compensation through a taxable receipt. Payments made to regulators in respect of their compliance costs are considered to be expenses of doing business and are therefore deductible for corporation tax purposes. However, the changes in the Finance (No 2) Act 2015 are intended to ensure that, by virtue of the taxable receipt, the administrative and regulatory costs associated with banks' misconduct and mis-selling are also disallowed for tax purposes.
- Tax implications of UK bank agreements with overseas regulators. If a UK bank reaches an agreement with an overseas regulator that is in effect an alternative to a court imposed fine (for example, in place of threatened legal action for regulatory infringements), any payments under the agreement will be non-deductible for corporation tax purposes.
- Costs incurred by banks in producing reports under section 166 of the Financial Services and Markets Act 2000 (FSMA). Costs incurred by a bank in producing a section 166 "skilled persons" report for the FCA are tax deductible for corporation tax purposes and are not directly impacted by the changes in Finance (No 2) Act 2015. In line with the overall policy, administrative costs associated with section 166 reports are only non-deductible where they have resulted in material compensation expenditure and therefore a material breach of regulations has been revealed.
In this second letter (dated 6 April 2016), Mr Tyrie thanks Mr Osborne for the clarification. However, he states that, if he has understood Mr Osborne correctly, it is possible that some payments to regulators might be deemed to be general compensation (to people other than customers) and therefore deductible for corporation tax purposes. If so, "taxpayers are on the hook for some aspects of a bank's misconduct." Mr Tyrie considers this to be "unacceptable" and urges Mr Osborne to "look again at this".