Government eyes tax windfall from mis-sold loan insurance

LONDON Fri May 11, 2012 12:40pm BST

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LONDON (Reuters) - Britain's stretched public finances could benefit from a windfall worth millions of pounds as people mis-sold insurance policies must pay tax on interest linked to their compensation.

HMRC, Britain's tax authority, has published advice on paying tax on interest from payment protection insurance (PPI) compensation payments, targetting higher rate taxpayers in particular.

Britain's banks will pay out about 7 billion pounds or more for mis-selling the loan insurance, and have been lining up in recent days to raise how much money they are setting aside for payouts as claims flood in.

HSBC (HSBA.L) said on Tuesday it was making an extra $468 million provision. Royal Bank of Scotland (RBS.L), Barclays (BARC.L) and Lloyds (LLOY.L) have also lifted the amount they are setting aside.

The Financial Services Authority, which regulates the banks, has been encouraging investors to make a claim and said last week that lenders have so far paid out 3 billion pounds.

The compensation includes a sum paid as premiums and interest on those premiums which could have been earned elsewhere.

"It is on the interest portion where the hundreds of millions of pounds of potential tax windfall could come from for the government," said Chas Roy-Chowdhury, head of taxation at ACCA, an accounting body.

"As the compensation claims are happening on an industrial scale, the government should change the law," Roy-Chowdhury said.

A HMRC spokesman said there was a longstanding rule that interest on compensation was taxable, adding tax would have been due in any case had people put their money into alternative investments such savings accounts.

It is unclear how many people took out PPI products with estimates ranging from many thousands to millions.

(Reporting by Huw Jones; Editing by Mark Potter)

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