How should the compensation payments made by the Post Office to subpostmasters following the Horizon scandal be treated for corporation tax purposes? It seems unlikely that the payments should be deductible, either because of public policy grounds or by reference to the basic ‘trading purposes’ principle. Whether the receipts from government to fund those payments are taxable, however, is less clear.
Heather Self (Blick Rothenberg) considers the tax issues surrounding
compensation payments made by the Post Office to subpostmasters.
Much of the focus on the Post Office scandal has, rightly, been on the injustice suffered by the many subpostmasters who were wrongly prosecuted as a result of failures with the Horizon software system. However, there is always a tax angle – and in this case, there are tax issues for both the subpostmasters and the Post Office itself.
Dan Neidle, of Tax Policy Associates, has done sterling work in analysing and explaining the issues in detail. His website (taxpolicy.org.uk) has posts dealing with the tax issues for subpostmasters (at bit.ly/TPAonPO) and the corporation tax issues for the Post Office (bit.ly/TPAonPOtaxrelief).
This article focuses mainly on the corporation tax issues, and attempts to provide a brief summary (although it would be well worth making the time to read Dan’s full post). In relation to the subpostmasters, the main problem is that one of the key compensation schemes, the Horizon Shortfall Scheme, calculated compensation on the basis of paying a lump sum for loss of earnings. The sum was taxable, but pushed most recipients into higher tax brackets. The Post Office has now agreed to make top up payments, which will be exempt from tax – but it has taken so long to calculate these that the 31 January 2024 filing deadline is almost upon us. HMRC have now confirmed that they will not charge interest and penalties, and have set up a helpline for affected individuals. For anyone who would prefer to speak to a tax adviser rather than HMRC, Rebecca Benneyworth has set up a network of qualified volunteers who will provide advice and help to file tax returns free of charge; there is a website explaining all this at www.subpostmasterstax.org.uk. I am in awe of how Rebecca has found time to do this at such a busy time of year.
The corporation tax position
The corporation tax position is less clear. There are some veiled references to discussions with HMRC in the 2022/23 Post Office accounts, but no clarity on the amounts or principles involved. Dan’s conclusion is that a deduction has been incorrectly claimed for the compensation payments and related expenses, with a potential tax liability of around £100m. He also considers that the funding received from government to cover the Post Office’s shortfall is likely to be taxable, leading to a double hit to the Post Office’s balance sheet (and no doubt to further funding being needed from Government in due course).
I agree with Dan on his first conclusion, but am less convinced on the second.
The Post Office is wholly-owned by government, but it trades at arm’s length and is fully subject to corporation tax. It is supposed to seek to make a trading profit, but due to all the recent problems it has had to receive significant support, in the form of top-up payments, in recent years.
In relation to the compensation payments, the first and most basic question is whether they are made ‘wholly and exclusively’ for trading purposes. Given that the Post Office falsely accused up to 4,000 subpostmasters of theft, and was ordered by the courts to pay significant compensation, it is difficult to see that these payments are deductible. There is a further point, in that payments in the nature of a fine are not deductible as a matter of public policy. While these payments represent compensation rather than fines, I think there is an interesting analogy to be drawn with the 2023 Upper Tribunal case of Scottish Power (SCPL) Ltd and others v HMRC [2023] UKUT 218 (TCC). Scottish Power was found by its regulator, Ofgem, to have breached regulatory requirements relating to matters such as mis-selling and complaints handling. The company reached a settlement with Ofgem, under which it paid a nominal penalty and £28m in compensation to customers. It was held that the compensation was ‘of a penal nature’ and so was not deductible. It seems to me that the compensation paid by the Post Office should also not be deductible, either on public policy grounds or by reference to the basic ‘trading purposes’ principle.
Should the receipts from government be taxable?
The Post Office accounts recognise the compensation payments as liabilities, but they do not bring in the expected receipts from government as the amount and timing of these is less certain. Dan draws attention to the principle that a payment made to support general trading will be taxable, as set out in HMRC’s Business Income Manual at BIM41810 which says that ‘if the character in the recipient’s hands is that of a payment made in order that the money may be used in the recipient’s business’ then it will be taxable.
However, I am less sure that these receipts are of precisely that nature. The accounts for 2022/23 (bit.ly/POaccounts) set out the funding position in some detail in Note 1, particularly in the review of the going concern basis. The overall position is complex, but it appears that the Post Office requests tranches of funding specifically to meet the compensation costs. Surely, if the payments are not a business expense, and the receipt is being made to fund that non-business expense, then there is a respectable argument that the receipts are not taxable?
Conversely, in the unlikely event that the Post Office succeeds in convincing HMRC that the expenses are deductible, then I would expect the corresponding receipts to be taxable.
My guess is that the Post Office is currently arguing that the payments are deductible and the receipts non-taxable, while HMRC are arguing the opposite. I think it is unlikely that either side will succeed in both arguments, and would expect an eventual settlement on the basis that the payments are not deductible and the receipts are not taxable. On Dan’s calculations, that would lead to tax payable of around £100m – a further material sum which, ultimately, is likely to be funded by taxpayers.
How should the compensation payments made by the Post Office to subpostmasters following the Horizon scandal be treated for corporation tax purposes? It seems unlikely that the payments should be deductible, either because of public policy grounds or by reference to the basic ‘trading purposes’ principle. Whether the receipts from government to fund those payments are taxable, however, is less clear.
Heather Self (Blick Rothenberg) considers the tax issues surrounding
compensation payments made by the Post Office to subpostmasters.
Much of the focus on the Post Office scandal has, rightly, been on the injustice suffered by the many subpostmasters who were wrongly prosecuted as a result of failures with the Horizon software system. However, there is always a tax angle – and in this case, there are tax issues for both the subpostmasters and the Post Office itself.
Dan Neidle, of Tax Policy Associates, has done sterling work in analysing and explaining the issues in detail. His website (taxpolicy.org.uk) has posts dealing with the tax issues for subpostmasters (at bit.ly/TPAonPO) and the corporation tax issues for the Post Office (bit.ly/TPAonPOtaxrelief).
This article focuses mainly on the corporation tax issues, and attempts to provide a brief summary (although it would be well worth making the time to read Dan’s full post). In relation to the subpostmasters, the main problem is that one of the key compensation schemes, the Horizon Shortfall Scheme, calculated compensation on the basis of paying a lump sum for loss of earnings. The sum was taxable, but pushed most recipients into higher tax brackets. The Post Office has now agreed to make top up payments, which will be exempt from tax – but it has taken so long to calculate these that the 31 January 2024 filing deadline is almost upon us. HMRC have now confirmed that they will not charge interest and penalties, and have set up a helpline for affected individuals. For anyone who would prefer to speak to a tax adviser rather than HMRC, Rebecca Benneyworth has set up a network of qualified volunteers who will provide advice and help to file tax returns free of charge; there is a website explaining all this at www.subpostmasterstax.org.uk. I am in awe of how Rebecca has found time to do this at such a busy time of year.
The corporation tax position
The corporation tax position is less clear. There are some veiled references to discussions with HMRC in the 2022/23 Post Office accounts, but no clarity on the amounts or principles involved. Dan’s conclusion is that a deduction has been incorrectly claimed for the compensation payments and related expenses, with a potential tax liability of around £100m. He also considers that the funding received from government to cover the Post Office’s shortfall is likely to be taxable, leading to a double hit to the Post Office’s balance sheet (and no doubt to further funding being needed from Government in due course).
I agree with Dan on his first conclusion, but am less convinced on the second.
The Post Office is wholly-owned by government, but it trades at arm’s length and is fully subject to corporation tax. It is supposed to seek to make a trading profit, but due to all the recent problems it has had to receive significant support, in the form of top-up payments, in recent years.
In relation to the compensation payments, the first and most basic question is whether they are made ‘wholly and exclusively’ for trading purposes. Given that the Post Office falsely accused up to 4,000 subpostmasters of theft, and was ordered by the courts to pay significant compensation, it is difficult to see that these payments are deductible. There is a further point, in that payments in the nature of a fine are not deductible as a matter of public policy. While these payments represent compensation rather than fines, I think there is an interesting analogy to be drawn with the 2023 Upper Tribunal case of Scottish Power (SCPL) Ltd and others v HMRC [2023] UKUT 218 (TCC). Scottish Power was found by its regulator, Ofgem, to have breached regulatory requirements relating to matters such as mis-selling and complaints handling. The company reached a settlement with Ofgem, under which it paid a nominal penalty and £28m in compensation to customers. It was held that the compensation was ‘of a penal nature’ and so was not deductible. It seems to me that the compensation paid by the Post Office should also not be deductible, either on public policy grounds or by reference to the basic ‘trading purposes’ principle.
Should the receipts from government be taxable?
The Post Office accounts recognise the compensation payments as liabilities, but they do not bring in the expected receipts from government as the amount and timing of these is less certain. Dan draws attention to the principle that a payment made to support general trading will be taxable, as set out in HMRC’s Business Income Manual at BIM41810 which says that ‘if the character in the recipient’s hands is that of a payment made in order that the money may be used in the recipient’s business’ then it will be taxable.
However, I am less sure that these receipts are of precisely that nature. The accounts for 2022/23 (bit.ly/POaccounts) set out the funding position in some detail in Note 1, particularly in the review of the going concern basis. The overall position is complex, but it appears that the Post Office requests tranches of funding specifically to meet the compensation costs. Surely, if the payments are not a business expense, and the receipt is being made to fund that non-business expense, then there is a respectable argument that the receipts are not taxable?
Conversely, in the unlikely event that the Post Office succeeds in convincing HMRC that the expenses are deductible, then I would expect the corresponding receipts to be taxable.
My guess is that the Post Office is currently arguing that the payments are deductible and the receipts non-taxable, while HMRC are arguing the opposite. I think it is unlikely that either side will succeed in both arguments, and would expect an eventual settlement on the basis that the payments are not deductible and the receipts are not taxable. On Dan’s calculations, that would lead to tax payable of around £100m – a further material sum which, ultimately, is likely to be funded by taxpayers.
