Introduction 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.
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.