Feb 5, 2016 - the USA, as a result of misconduct or miss-selling, should not be deductible ... appropriate that the cost
Treasury Committee House of Commons, Committee Office 14 Tothill Street, London SW1 H 9NB Tel 020 7219 5769 Fax 020 7219 2069 Email
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Rt Hon George Osborne MP Chancellor of the Exchequer HM Treasury 1 Horse Guards Road London SWlA 2HQ 5 February 2016
TAX DEDUCTIBILITY OF FINES IMPOSED BY REGULATORS ON BANKS
In principle, payments required by regulators in the UK, and in other countries such as the USA, as a result of misconduct or miss-selling, should not be deductible for corporation tax purposes. Your Budget was a step in the right direction on this point. A number of points needing clarification have been put to me about this issue. As I understand it, current tax law states that • Fines are not deductible; • General compensation is in principle deductible; • Following the Finance (No.2) Act 2015, "banking companies" are not entitled to deduct compensation paid to customers (other than a few exceptions set out in section 1330 of the Corporation Tax Act 2009 as amended), and are deemed to have notional receipts of 10 per cent of the compensation they have to pay (to ensure that any deduction claimed for the legal and administrative costs of making the compensation is offset by an equivalent taxable receipt); • Legal fees relating to both regulatory proceedings (where fines might be imposed) and litigation (where compensation might arise) are deductible, but may be offset by the 10 per cent notional receipt. I would be grateful for confirmation that all payments imposed on banks by regulators, other than those excluded by section 1330, cannot be deemed to be "compensatory" and therefore deductible under current tax legislation, whether they are made to
individual customers, to state authorities or to any other bodies. At present there seems some doubt about this. It appears that payments made to regulators, rather than to customers, may be deductible in some circumstances. HMRC's Business Income Manual 42515 suggests this when it says that "when a trader incurs a liability to a regulatory body on revenue account that is broadly intended to cover the regulator's costs ofperforming its duties in relation to the trading activities, such costs will normally be allowable even where the trader has committed a breach of regulations". If so, this would be unacceptable. It is important that taxpayers are not required to bear part of the burden of any payment imposed by the FCA or overseas regulators. The bill should be picked up by the bank's shareholders. If they are not happy about it, they have a number of possible remedies, including controlling employees' remuneration. Secondly, while it is not just appropriate, but essential, that fines or other payments should not be tax deductible where banks are guilty of misconduct, it is equally appropriate that the costs that they incur in producing section 166 reports for the FCA should be tax deductible, where the reports do not result in a referral to the FCA's enforcement department. These costs can be a significant burden on banks and other institutions, often when there is no proven misconduct. In those cases, they would appear to be legitimate business costs. However, the tax position is still unclear following the exchange between Mark Garnier and the Economic Secretary in the Finance Bill Committee on 13 October (Official Report Columns 77 to 78), and I would welcome your clarification. Are the costs incurred by a bank in producing section166 reports tax deductible, if they do not lead to a fine or a requirement for remedial action on the bank's part? A related point has also been drawn to my attention about the tax implications of 'agreements' reached by UK banks with foreign regulatory authorities. These are made in lieu of threatened legal action for regulatory infractions. Although deductions are explicitly disallowed for US tax purposes in such settlements, it has been suggested to me that the "agreements" can, in certain circumstances, be structured so as to permit UK tax deductibility. I do not know whether this suggestion is well founded and I would welcome your clarification. If true, then it would appear to breach the spirit of the established principle of UK tax law that punitive fines are not deductible, as these "agreements" are an alternative to a court-imposed fine. It would also be alarming if banks could pass on part of the burden to domestic taxpayers. Banks may regard the behaviour of US regulators towards foreign banks as disproportionate, perhaps reprehensible. However, the remedy for UK banks should be either to resist the pressure to reach agreed settlements or to enlist the UK government to discuss their concerns over state authorities' practices with the Federal Government.
I will be placing this letter, and your response in due course, in the public domain.
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RT HON ANDREW TYRIE MP CHAIRMAN OF THE TREASURY COMMITTEE
