Clause 27 - Payments of interest

Part of Finance Bill – in a Public Bill Committee at 4:30 pm on 21 May 2013.

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Photo of David Gauke David Gauke The Exchequer Secretary 4:30, 21 May 2013

The hon. Lady raises an interesting point. I will turn to that in my remarks later or I will write to her. I will try to address the matter shortly. Before I do so, I will conclude my remarks on the measure.

The change with regard to vouchers provides a clear rule for the first time, ensuring that the recipient of interest in kind will receive a statement from the retailer or the institution showing the value of what they have received, and can therefore complete their own self-assessment returns correctly.

I will try to address the points raised by the hon. Lady. Compensation should not be taxable and there is a concern that we are extending the definition of what constitutes interest for tax purposes. This change does not extend the definition of what constitutes interest for tax purposes in any way; nor does it affect the long-term established manner in which the taxation of compensation operates. Many compensation payments, for example for mis-sold personal pensions, benefit from statutory exemptions, but in other cases compensation includes interest for the period that the investor did not have the use of the funds or where there is a delay in making the payment.

These amounts have always been taxable interest and remain so. This measure ensures that tax is deducted at source from that interest and will be of benefit to the vast majority of taxpayers who will not have to complete self-assessment returns just because they have received a one-off compensation payment that includes some interest.

The Low Incomes Tax Reform Group has expressed concern about a power to disapply the rule on deduction of tax from interest on compensation payments. The calculation of compensation payments and the interest on it in cases involving financial mis-selling can be complicated. The power is there in reserve to enable the rules to be adapted quickly in response to particular situations where it might be appropriate not to tax the payment in question without needing to wait until the next Finance Bill to address the problem.

The LITRG was also concerned that the deduction of tax from interest in compensation was unfair to non-taxpayers. It has raised the point about using the R85 system, which is designed for regular payments of interest by banks and building societies through the tax deduction scheme for interest. Most of the payments to which the rule applies will be one-off payments. Some will be paid by banks and building societies. Some will be paid by other institutions that are not within the TDSI system. The majority of people receiving interest on compensation payments are likely to be basic-rate taxpayers. For such taxpayers, the new arrangements will be a big improvement as they will no longer have to complete tax returns just because they have received a one-off payment of this sort. Non-taxpayers receiving interest as part of compensation payments can reclaim the tax, as they can if they receive any other payment under deduction of tax, but it would be disproportionate to design a system equivalent to the R85 system for these one-off payments. HMRC would be very happy to continue to work with the LITRG on the R85 or other matters in this area.

The position on vouchers, cashback and non-cash incentives is that cashback on purchases is a discount on that purchase, such as a fuel card that earns a rebate in points towards fuel or cash. This is a long-standing position, and nothing in the Bill will change that. In terms of how interest in kind will affect companies, if a company pays interest it must deduct tax now. Nothing has changed as a consequence of these measures. Interest in kind has always been taxable. Now, essentially, we have the same rules to clarify how to value it and to require deduction at source. This measure provides some useful clarification. I hope that those points are helpful to the Committee.