Section 33: Fscs Payments Representing Interest
Summary
1.Section 33 ensures that people who have or will receive compensation from the Financial Services Compensation Scheme (FSCS) that includes a payment representing interest are taxed in the same way as if the payment were interest paid by the financial institution that went into default. Where the FSCS has calculated a payment as if it were interest (accrued but unpaid by the financial institution) from which tax had been deducted then the section enables the recipient to treat the amount deducted by the FSCS in the same way as if it were tax deducted from interest.
Details of the Section
2.Subsection (2) includes new section 380A Income Tax (Trading and Other Income) Act 2005 (ITTOIA) on the list of payments treated as interest in section 369 of that act.
3.New section 380A introduces provisions to ensure payments representing interest made under the FSCS are treated as if they were interest chargeable to income tax.
4.New section 380A(1) provides that any payment made under the FSCS representing interest is treated as interest in the hands of the recipient.
5.New subsection (3) provides for the amount treated as interest to include any amount equivalent to income tax deducted from the payment representing interest under the FSCS.
6.New section 979A of the Income Tax Act 2007 (ITA) ensures that where the FSCS has calculated compensation as if a sum of tax had been deducted then the recipient can bring that sum into account when calculating their tax liability.
7.New section 979A(1) provides that the new section applies if a payment is made under the FSCS which has been calculated as if the payment were interest from which tax would have been deducted.
8.New subsection (2) ensures that the recipient is treated as if they had been paid the relevant gross amount from which a sum representing income tax had been deducted at source.
9.New subsection (3) allows the sum treated as income tax to be repaid to the recipient or set off against their income tax liability.
10.New subsection (4) defines the “relevant gross amount” as the total of the sum representing income tax deducted by the FSCS and the payment representing interest.
11.New subsection (5) provides an obligation on the scheme manager of the FSCS to supply certain information to the recipient if requested to do so in writing. And new subsection (6) provides that the recipient can enforce such a request.
12.Subsection (5) of the section provides that the section applies to payments made by the FSCS on or after 6 October 2008.
Background Note
13.The FSCS is the UK’s statutory fund of last resort for customers of authorised financial services firms. The FSCS can pay compensation if a firm is unable, or likely to be unable, to pay protected claims against it. Since the beginning of October 2008 a number of banks have ceased trading in the UK. Some of the deposits held by these banks have been transferred to other solvent banks. Where the deposits could not be transferred, the FSCS has paid or may pay compensation to eligible depositors.
14.The FSCS includes in the compensation it pays a sum equivalent to accrued interest on the deposit from the last date interest was paid by the financial institution to the date of default of the financial institution. If the deposit was a fixed term deposit and the claimant opted to hold their deposit until maturity then the FSCS will pay a sum equivalent to interest that has accrued up to and including the maturity date of the deposit. When calculating the sum equivalent to interest the FSCS also takes into account whether or not the financial institution in default would have deducted tax from interest on that deposit. If the financial institution in default would have deducted tax then the FSCS deducts the same amount from the compensation – so the sum equivalent to interest is ‘net of tax’.
15.Even though the sum equivalent to interest paid under the FSCS is the same amount that would have been paid as interest (either net or gross) by the financial institution if it had not been declared in default, the taxation of the sum is unclear. This section ensures that the recipients of the compensation are in the same position that they would have been had the financial institution not been declared in default and so the sums equivalent to interest are treated as interest in the hands of the recipient.
16.This means that the sums equivalent to accrued interest are chargeable to income tax in the same way as any bank interest. The amount that the FSCS has deducted to represent ‘tax deducted’ is included in the calculation of the income tax liability as tax paid. Therefore basic rate taxpayers will not have to pay anything more, starting rate and non-taxpayers can make repayment claims in the normal way, and higher rate taxpayers will be liable for an extra 20 per cent.
17.This section only applies for income tax purposes because for companies the taxation of deposits with financial institutions is within the loan relationship provisions in Parts 5 and 6 of the Corporation Tax Act 2009.
18.The following is a simplified example of how the FSCS calculates compensation. In the example the bank customer has deposited £10,000 in an interest bearing account and the interest is credited monthly. The bank went into default on the 15 November 2008 and FSCS compensation is calculated to this date.
| Principal deposited on 1/7/08 | £10,000 |
| Interest paid monthly by the bank (£60 per month gross less tax deducted £12) | |
| July 2008 | £48 |
| August 2008 | £48 |
| September 2008 | £48 |
| October 2008 | £48 |
| Depositor's Balance as at 15/11/08 | £10,192. |
| Payment representing interest paid by the FSCS from 1/11/08 to 15/11/08 calculated as if tax of £6 were deducted from £30 gross. | £24 |
| Total compensation paid by FSCS | £10,216 |
19.In the example above, it is the £24 paid by the FSCS that is the subject of this section. New section 380A of ITTOIA charges to income tax as interest the payment representing interest of £24 plus the amount representing tax that has been deducted by the FSCS - £6. The total charge to income tax under this section would be £30 and this is also the relevant gross amount for new section 979A of ITA.
20.If in the example the bank customer were a non-taxpayer then the £6 that represents tax that has been “deducted” by the FSCS can be included in a repayment claim. If the customer is a basic rate or higher rate taxpayer then the £6 will be included as a credit in the calculation of their tax liability for the 2008-09 tax year. This is exactly the same income tax treatment as if the interest were paid by the bank.
