Victims of endowments misselling could face further costs for failing to pay tax on their compensation packages, acc-ording to the Inland Revenue's latest update.
In its August monthly rev-iew, the Revenue says it wants to make it absolutely clear to consumers and their accountants that interest received as part of misselling compensation will be subject to tax.
Compensation for pension misselling is protected from income tax by a clause in the Finance Act 1996 but no such provision has been made for other misselling claims.
The FSA has already overseen payouts of £1bn in compensation to 600,000 consu-mers for mortgage endowment misselling, the taxation of which would generate a sizeable income for the Revenue.
The Revenue has moved to clear up confusion over whe-ther interest included in a compensation award can be considered as “damages”. It says although this may be the case, interest is still being paid and is therefore taxable.
A typical endowment hol-der may get £20,000 in compensation with £15,000 as a refund of premiums, leaving £5,000 to compensate for the time that the consumer did not have use of the money.
This would leave a higher-rate taxpayer with a bill of £2,000 and a basic-rate taxpayer with a bill of £1,000 owed to the Revenue.
Conservative Shadow Chief Secretary to the Treasury Howard Flight says: “It would have been sensible for the Treasury to plan ahead for this so it would have a de minimis impact and come up with a limit that people would have to pay. If it goes ahead as it is,no one will understand who should be paying tax.”