Compensation payments made by banks—non-deductibility and notional trade receipt

Produced in partnership with Andrew Loan of Fieldfisher

Practice notes

Compensation payments made by banks—non-deductibility and notional trade receipt

Produced in partnership with Andrew Loan of Fieldfisher

Practice notes

This Practice Note outlines the rule that, with effect from 8 July 2015 (or 15 July 2015 in the case of corporate partners):

•
prevents banking companies from claiming a tax deduction for certain compensation expenses, and
•
adds a sum equal to 10% of the non-deductible compensation expense to the relevant banking company’s taxable profits

This Practice Note does not cover the tax treatment of the receipt of compensation payments by banks. Recent cases such as O’Neil and another v HMRC [2023] UKFTT 290 (TC) and Hackett and another v HMRC [2024] UKFTT 749 (TC) have considered this issue. For more information, see Practice Note: Direct tax treatment of damages and compensation payments.

Reasons behind the rules

The government introduced the rules providing for the non-deductibility of compensation payments made by banks, and treating banks as receiving a notional trade receipt of 10% of the non-deductible amount, to:

•
‘protect the Exchequer from banks’ past management failures’, and
•
‘ensure the [banking] sector makes an appropriate contribution to restoring the public

Andrew Loan

Fieldfisher

Andrew Loan, Of Counsel, in the London office of Fieldfisher has over 15 years' experience advising on a wide variety of corporate tax and VAT matters. Andrew has a particular focus on taxation issues in the context of acquisitions and disposals of public and private companies, and also the taxation of corporate groups, real estate and investment funds, and tax investigations and disputes.

Andrew is a solicitor and a chartered tax adviser, and has served as an officer of the taxes committee of the International Bar Association for the last four years.

Andrew has written articles for a variety of publications, including Taxation, the Tax Journal, and PLC magazine, and speaks regularly at international conferences on tax matters

Jurisdiction(s):

United Kingdom

Key definition:

Deductible definition

What does Deductible mean?

Specified self-insured amount that a loss must exceed, that the insured must pay first, before claim(s) become payable by the (re)insurer.

Compensation payments made by banks—non-deductibility and notional trade receipt

Produced in partnership with Andrew Loan of Fieldfisher