Compensation for mis-selling of an interest rate swap was a revenue receipt
In D Wilkinson v HMRC [2020] UKFTT 362 (TC) (11 September 2020), the FTT held that compensation received by the taxpayer for mis-selling of an interest rate swap was revenue and therefore taxable as income. The ‘basic redress element’ of the compensation was a receipt of the taxpayer’s UK property business and the ‘interest element’ was taxable as interest.
The taxpayer borrowed substantial amounts from Barclays for the purposes of his UK property business. It was a condition of the loans that he should take out some interest rate protection and he entered into an interest rate swap, also with Barclays. The amounts paid by the taxpayer under the swap were treated as revenue expenses in calculating his taxable property business profits. Following an independent review of its practices in selling interest rate hedging products, in 2014/15 Barclays paid the taxpayer £460,000 in compensation for mis-selling the swap. The taxpayer argued that the payment was capital and so not subject to income tax.
The FTT considered the two elements of the compensation payment separately. The taxpayer argued that the basic redress element was compensation for the implicit cost of entering into the swap, which was being deprived of the opportunity to pursue an alternative interest rate hedging strategy. Since that implicit cost was never reflected in the taxpayer’s accounts, the element was not referable to any revenue item in the accounts and so was capital in nature. The FTT, however, concluded that it was absolutely clear that the element was paid to compensate the taxpayer for the fact that he incurred more expenses than he would otherwise have done. In particular, the payment was described by Barclays as a refund and the element was calculated by reference to payments made by the taxpayer under the swap. The payment was therefore a taxable revenue receipt of the property business.
The interest element was calculated at an 8% simple rate on the amount of the basic redress element, but the taxpayer submitted that it was simply additional compensation and was capital in nature on the same basis as the basic redress element. The FTT rejected this argument. It was clear that the interest element was intended to be compensation for the fact that the appellant had been deprived of his money for a period of time due to the swap payments and was therefore properly characterised as interest.
Why it matters: The issue in this case has been before the tribunals before, but the taxpayer here put forward some novel economic arguments to support his case that this was a capital receipt. The FTT considered these carefully, but it went back to first principles and had no difficulty in finding that compensation paid for a mis-sold interest rate swap was a taxable revenue receipt of his property rental business so was subject to income tax. The amount identified as the ‘interest element’ of the payment was actual interest and so was also subject to income tax.
Compensation for mis-selling of an interest rate swap was a revenue receipt
In D Wilkinson v HMRC [2020] UKFTT 362 (TC) (11 September 2020), the FTT held that compensation received by the taxpayer for mis-selling of an interest rate swap was revenue and therefore taxable as income. The ‘basic redress element’ of the compensation was a receipt of the taxpayer’s UK property business and the ‘interest element’ was taxable as interest.
The taxpayer borrowed substantial amounts from Barclays for the purposes of his UK property business. It was a condition of the loans that he should take out some interest rate protection and he entered into an interest rate swap, also with Barclays. The amounts paid by the taxpayer under the swap were treated as revenue expenses in calculating his taxable property business profits. Following an independent review of its practices in selling interest rate hedging products, in 2014/15 Barclays paid the taxpayer £460,000 in compensation for mis-selling the swap. The taxpayer argued that the payment was capital and so not subject to income tax.
The FTT considered the two elements of the compensation payment separately. The taxpayer argued that the basic redress element was compensation for the implicit cost of entering into the swap, which was being deprived of the opportunity to pursue an alternative interest rate hedging strategy. Since that implicit cost was never reflected in the taxpayer’s accounts, the element was not referable to any revenue item in the accounts and so was capital in nature. The FTT, however, concluded that it was absolutely clear that the element was paid to compensate the taxpayer for the fact that he incurred more expenses than he would otherwise have done. In particular, the payment was described by Barclays as a refund and the element was calculated by reference to payments made by the taxpayer under the swap. The payment was therefore a taxable revenue receipt of the property business.
The interest element was calculated at an 8% simple rate on the amount of the basic redress element, but the taxpayer submitted that it was simply additional compensation and was capital in nature on the same basis as the basic redress element. The FTT rejected this argument. It was clear that the interest element was intended to be compensation for the fact that the appellant had been deprived of his money for a period of time due to the swap payments and was therefore properly characterised as interest.
Why it matters: The issue in this case has been before the tribunals before, but the taxpayer here put forward some novel economic arguments to support his case that this was a capital receipt. The FTT considered these carefully, but it went back to first principles and had no difficulty in finding that compensation paid for a mis-sold interest rate swap was a taxable revenue receipt of his property rental business so was subject to income tax. The amount identified as the ‘interest element’ of the payment was actual interest and so was also subject to income tax.
