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July 14th 2017 / BY: Wisteria

Are HMRC Overtaxing Customers on Purpose?

Nearly all customers who have previously taken out a HCSTC loan will have very little in the way of savings. They are likely to be basic rate tax payers and usually receive less than £1,000 of interest per year.

Until recently the Financial Ombudsman told Lenders that they ‘may’ have to deduct 20% tax on interest payments paid to customers. Typically, such payments were only made in limited circumstances where a customer makes a claim for compensation which is upheld by the Ombudsman.

Whilst HMRC had some guidance on the withholding tax implications for compensation payments, this was focussed on PPI reclaims.

The Financial Ombudsman has now changed it’s stance and is saying that HMRC “do require” lenders to deduct 20% tax on the payments of interest to customer. No doubt this is as a result of an instruction from HMRC – not something they have published guidance on I would add!

In 2017 the tax rules changed and for a basic rate tax payer the first £1,000 of interest is tax free. Where the FOS find in favour of a customer and direct the lender to pay interest to the customer. The interest will now be subject to the withholding of tax.

This is in spite of the fact that the customer may not actually be due to pay tax on this interest!

Unless the customer does a tax return or makes a separate claim then any withholding tax will essentially be an over payment of tax that will go undetected.

Is this fair? We believe not. We would urge you to write to The Rt Hon Mel Stride MP, the Financial Secretary to the Treasury at mel.stride.mp@parliament.uk. It would be useful if you could CC amillet@wisteria.co.uk.