Beware of PPI Interest

We’ve all had them over the past few years…. an endless barrage of calls from legal claims companies claiming to be able to recover Payment Protection Insurance (PPI) that was mis-sold to us by banks and other credit providers. For some of us they have been simply an unwelcomed nuisance but for many others they have been the start of a journey towards an unexpected windfall. We all know of someone who has been able to claim back hundreds of pounds in respect of credit cards that they have long since stopped using or a loan that has been long-since repaid. If you were one of those people there is something that you need to be aware of to avoid falling foul of HM Revenue & Customs (HMRC).

The refunds of PPI premiums paid are non-taxable and, as such, do not need to be disclosed on self-assessment tax returns. Similarly, any repayment of interest where the PPI premiums were added to the loan amount are also non-taxable. The refund of these simply put the claimant back into the position that they would have been in had they not taken out the PPI and represent what is referred to as ‘general redress’. However, in many cases the amount received will have included an additional 8% interest on the total refunded amount, paid as compensation for the mis-selling of the PPI. This compensation, unlike the refunded PPI premiums and historic interest, is taxable and needs to be reported to HMRC as taxable income. Some institutions will have paid the interest net of basic rate tax, whereas others may have paid the interest gross with no deduction of tax. In either case, the institution issuing the refund should provide a breakdown of the amount repaid in the redress offer letter indicating whether or not basic rate tax has been deducted at source.

So, what do you need to do? Well, if no tax has been deducted or if you are a higher rate tax payer and only 20% basic rate tax has been stopped, then you will have a tax liability which will need to be reported to HMRC. This should generally be paid in the tax year in which you received the payment but you have an obligation to declare any income on which tax is due in the last six years, so, if you received a payment a few years ago, it will still need to be declared to HMRC this year if you haven’t previously done so. If you complete a self assessment tax return, the amount received (an any tax deducted at source) will simply need to be included on your tax return along with any other income received during the year. If you are employed and don’t complete a tax return you will need to inform your tax office so that adjustment can be made to your tax code allowing the owed amount to be collected through the PAYE system. If you have any concerns or are unsure what you need to do in respect of a PPI refund that you have received contact your accountant who will be able to advise you.

A Cautionary Tale

Once upon a time there was a man called Jeremy.  Jeremy was the son of Mr Clark a prominent businessman who owned a chain of clothing retailers called ‘Top Gear’.  Despite having fairly extreme views about people towing caravans, Jeremy was, on the whole, a respectable law-abiding citizen. One day on his travels around the country he found himself driving in the environs of Barnsley on the M1 motorway.  All of a sudden, in his rear view mirror, he saw the dreaded flashing blue lights and was gestured to pull over by a police motorway patrol officer.

Now, Jeremy had been using his cruise control at a steady 68 miles per hour and was therefore in a confident, if not slightly belligerent, mood as the police officer approached his vehicle on the hard shoulder.  “Good morning sir” said the police officer, “do you know that you are driving a black Range Rover?”  “Of course” replied Jeremy somewhat perplexed.  “Well sir” said the officer, “last week in court we succeeded in a court action for speeding against a driver of a car the same colour and make as yours.  Since you are driving a car that is similar, we feel that that it is reasonable to assume that you were also speeding.  As such I am compelled to issue you with this fine of £100″.

“You cannot be serious” joked Jeremy in a poor impression of John McEnroe.  “That is totally stupid and no-one will believe and accept your view.”.  “Oh that does not matter” said the police officer calmly “the law has been changed recently, and now it does not matter what anyone else thinks. It is only our point of view that matters.”  “That is ridiculous” exploded Jeremy, “there is no way that I am going to pay this, I will see you in court first”.  The police officer smiled smugly and said “if you refuse to pay, then we will simply take the money from your bank account without your permission, and, as for the court, we will already have your money so there will be no rush to take the matter to court any time soon.”  “You can’ t do that!” blustered Jeremy “I will appeal against your demands”.  Again the police officer smiled and said “I am sorry sir but I’m afraid that you have no right to appeal.  If we say you have to pay, then, quite simply, you have no choice but to pay.  You have a nice day now!”

Jeremy drove back to his office in total bewilderment thinking things could not get any worse, but when he arrived there he realised that they already had.  He found that the police had been there before him and, unbeknownst to him, had taken copies of all his mileage records over the last 10 years and shortly thereafter he received numerous demands for payment relating to all the other trips that he had historically made up the M1 near Barnsley.

The local police chief inspector came to learn of these penalty fines and thought that they were a great idea, so much so that he quickly conveyed the idea to his counterparts throughout the country. Soon, all drivers of black Range Rovers up and down the country were faced with, what they considered to be, unfair penalty notices.  Despite their obvious outrage, the police issued statements through the national media about the dangers of Range Rover drivers speeding which would inevitably result in the the loss of lives and consequently, on moral grounds, such action on their part was cleverly justified to the masses.  Despite the howls of protest from black Range Rover drivers across the land, they were in a very small minority and the apathetic majority did not care as it did not affect them.

However, one day, the Government who were short of money to fund the struggling National Health Service, decided that they would start applying this money-spinning ruling to other makes of cars.  This resulted in obvious public outrage. How could such unconstitutional behaviour be allowed, whereby the police, an arm of the executive, could act  as judge, jury, and executioner against the general public with no right of appeal.  There was talk of going to the European Court of Human Rights and public riots as disaffected drivers protested in the streets. Then Jeremy woke up.  “Oh thank God” he cried. “It was just a bad dream.  Nothing like that could ever happen in this country, could it?”

You would think so wouldn’t you, but as you read this cautionary tale the wheels of a similar plan are already being put in motion.  The Government are currently bringing in measures whereby HM Revenue & Customs can demand money from individuals if they think that they are involved in tax arrangements that it believes are similar in nature to ones that it has previously won rulings against in court.  Under these new rulings, HMRC will not have to prove that its view is correct to make demands and can take the money directly from the bank accounts of those concerned with limited scope for appeal.  Furthermore, they propose going back over the last 10 years looking at arrangements that they have previously failed to take to court and apply such demands to these.

As in the nightmare scenario above, HMRC, an executive of the Government, will be authorised to act as judge, jury and executioner despite a history in this country of Parliament (the legislature) creating the rules, the police, HMRC, DHSS etc (the executive) applying the rules, and the courts (the judiciary) being the ones who judged whether or not the actions of the executive were lawful.

HMRC can say that it is morally justified in doing this as it is combatting people who are effectively depriving the state of the funds that it needs to operate.  As this is principally targetted at what are perceived to be wealthy ‘fat cats’ who are exploiting legal loopholes to get an unfair advantage, then the silent majority will not be too concerned by the lamentations of those who have been affected.  Nothing much will be said and, consequently, new laws will be established.

Even if you feel that this doesn’t directly affect you there is still reason that you should be concerned. As the saying goes ‘power corrupts, and absolute power corrupts absolutely’ and there is a very real danger that this could represent the proverbial ‘thin end of the wedge’. HMRC has a long-standing history of exploiting any loopholes that it can, in much the same way as the tax scheme providers it is vehemently opposing.  Eventually, the principles it has applied against the few, once established, could be applied against the many.  When HMRC begin to use similar devices to hit the pay packets of the wider public without a right to appeal the voice of mass public opinion will be awoken… but by then it could be too late! The time to act to stop this is now.  No matter what the evils are that are being combatted, any action that is taken must be applied in a manner that is congruent with the accepted legal constitution of the country.  We urge you to let your local MP know that such unconstitutional measures simply cannot be allowed to pass before a very dangerous precedent is established.