This clause deals with one aftermath of the default of a number of banks. Because of these bank failures the Financial Services Compensation Scheme has paid out more than £3 billion of compensation to bank customers. The hon. Gentleman is correct. We have discussed a number of the general principles surrounding this on many occasions. The compensation paid included not only the principal on the accounts but also a sum representing interest that the customers would have received had the bank not defaulted. The sum representing interest is the subject of this clause.
To ensure that customers are in the same position as they would have been in had the bank not defaulted, it is necessary to tax the sum representing interest as if it were interest for tax purposes. Without this clause the sum representing interest paid by the FSCS would not be taxed in the same way as interest paid by the banks is taxed. This would lead to unfairness between those customers of the defaulted bank whose accounts had been transferred to another bank or building society and those who receive FSCS compensation. The customers whose accounts were transferred would still be taxed on interest received from their new bank or building society but the customers receiving compensation from the FSCS would not be taxed on the sum relating to interest.
The FSCS has rightly calculated the compensation it has paid by taking into account whether or not the customer was a taxpayer. If they were, then it deducted from the amount equivalent to interest, a sum equivalent to income tax, just as tax is deducted from interest paid by the bank. Without this clause non-taxpayers will not be able to claim repayment of the amount deducted by the FSCS, and customers of the defaulted bank, who are liable to higher rate tax, cannot be charged that higher rate tax. That is why the clause is needed.
The hon. Member for Fareham asked whether, if an FSCS payment is less than the original capital, any part of that payment will be treated as interest. Whether the original capital has been repaid is an issue that falls outside the scope of the clause. The amount and nature of the compensation paid by the FSCS is a matter for the rules of the FSCS. He will be well aware of that.