Ministers are being urged to close a loophole that will allow UK banks and specialist lenders to avoid paying £2bn in tax on their payouts to motor finance scandal victims.
Under the current law, any operation that is not a bank can deduct compensation payments from their profits before calculating their corporation tax, reducing their bill.
UK banks have been blocked from claiming this relief since 2015, but it has now emerged that those due to pay redress as part of the pending £11bn car loan compensation scheme can exploit it because their motor finance arms are considered “non-bank entities”.
The Guardian has learned this includes the operations of big high street names including Barclays and Santander UK, and Lloyds Banking Group, which is the UK’s biggest provider of car loans through its Black Horse division.
Specialist lenders in the scandal, which include the lending arms of car manufacturers such as Honda and Ford, also fall outside this taxation rule.
The loophole means taxpayers will lose out on £2bn in corporation tax over the next two years, the Office for Budget Responsibility (OBR) confirmed.
The block on banks being able to remove compensation payouts – and any related expenses – before corporation tax bills were calculated was introduced in 2015 to ensure “past misconduct and management failure” did not impact state revenues. It meant that taxpayers did not lose out when banks paid out compensation for controversies such as the payment protection insurance (PPI) scandal.
Bobby Dean, a Liberal Democrat MP on the Treasury committee, is now urging the government to intervene to ensure the rule applies to payouts for car loan mis-selling.
“It’s not right that that the taxpayer is set to lose out on billions due to a loophole in compensation rules,” Dean said.
“The UK banned banks from deducting payouts from tax bills for good reason and it seems that those caught up in the motor finance scandal are going to dodge their responsibilities by operating through spin-off companies.
“I hope the government will intervene and ensure that the spirit of the compensation payout rules are maintained.”
OBR documents released alongside the autumn budget showed that corporation tax takings would be offset by a £2bn loss linked to the Financial Conduct Authority’s proposed motor finance compensation scheme over 2025-26 and 2026-27.
The scheme, which is out for consultation, is meant to compensate borrowers who were overcharged as a result of unfair commission arrangements between lenders and car dealers.
When asked for clarification, the OBR told the Guardian the forecasts were made on the basis that the compensation payouts by non-bank entities – in both banking and non-banking groups – were “expected to be deductible for corporation tax purposes”.
Dean said he is planning to write to ministers to raise the matter this week, days before the FCA’s consultation on the compensation scheme is due to close on Friday.
If maintained, however, it will provide another relief for banks which narrowly escaped a tax raid in the budget last month amid heavy sector lobbying.
Darren Smith, managing director of claims law firm Courmacs Legal, which is representing 1.5 million car finance victims said: “Following a budget that will lead to millions of people’s tax bills going up, it’s hard to understand why the Labour government is not closing this loophole, allowing big banks to profit from a £2bn tax break for their own historic misconduct.”
Lenders have continued to rail against their expected £11bn car finance compensation bill and have pushed for government support, with Rachel Reeves, the chancellor, already having tried to influence the direction of the car finance scandal this year, trying to intervene in a supreme court hearing in January.
The Guardian later revealed that Reeves was considering overruling the supreme court’s decision with retrospective legislation, in order to help save lenders billions of pounds in the event that it ruled in favour of consumers. The court largely sided with lenders in the end, and Reeves did not step in.
The Financing and Leasing Association (FLA) lobby group, which represents car lenders, has been pushing for the FCA’s compensation scheme terms to be narrowed, claiming the scheme’s terms are “so broad that they will compensate customers who suffered no loss – effectively ignoring the requirement for proportionality on the part of the regulator”.
Commenting on the loophole, the FLA’s director of motor finance, Adrian Dally, said: “Focus the scheme on loss, therefore it’ll cost less than proposed. That will have less of an impact on profits and lenders will pay more corporation tax as a result.”
The Treasury did not directly comment on the tax relief. A spokesperson said: “It is vital that consumers have access to motor finance to enable them to spread the cost of a vehicle in a way that is manageable and affordable.
“We want to see this issue resolved in an efficient and orderly way that provides certainty for consumers and firms.”
