Policy paper

Tax exemption for corporate recipients of compensation payments made under the Post Office Group Litigation Order and Horizon Shortfall Scheme

Published 18 July 2023

Who is likely to be affected

Sub postmasters (directors, employees or shareholders) entitled to, or in receipt of compensation payments under the Post Office Horizon Shortfall Scheme (HSS) or Group Litigation Order (GLO) who structured their business through a corporate entity.

General description of the measure

This measure provides an exemption from corporation tax on compensation payments from the HSS or GLO compensation schemes. Furthermore, the measure ensures any individual who receives the onward payment of compensation is taxed as though they received the payment directly.

Policy objective

The objective of this measure is to tax the GLO and HSS compensation received by a corporate entity, or the onward payment of that compensation to an employee, director or shareholder, in the same way as an individual recipient. The measure seeks to remedy potential discrepancies which arise due to some corporate entities no longer trading and payments under the schemes being made to ex-directors and or ex-shareholders.

For GLO recipients, this measure ensures that corporate recipients are treated consistently with the individuals, who were exempt from Income Tax by Statutory Instrument 184/2023.

For HSS recipients, this measure ensures that the corporate recipients are treated consistently with individuals, who are subject to tax, but are in receipt of a further top-up payment to account for tax liabilities which may arise.

Background to the measure

The measure was announced at L-Day 2023, and follows previous legislation exempting individuals in receipt of GLO payments from Capital Gains Tax and Income Tax (SI 143/2023).

Detailed proposal

Operative date

This measure will have retrospective effect, from 19 April 2021 when the first payment through HSS was made and from 8 August 2022 when the first payment through GLO to a corporate was made.

Current law

The compensation payments made to incorporated entities could be subject to tax under:

• Chapter 1, Part 2 Corporate Tax Act 2009
• Chapter 2, Part 3 Corporation Tax Act 2009
• Chapter 15, Part 3 Corporation Tax Act 2009
• Chapter 3, Part 4 Corporation Tax Act 2009
• Chapter 8, Part 10 Corporation Tax Act 2009

The onward payment of compensation to shareholders, through a cash distribution, may be subject to tax under:

• Chapter 2, Part 23 Corporate Tax Act 2010
• Chapter 3, Part 4 Income Tax (Trading and Other Income) Act, 2005

The onward payment of compensation to shareholders, through a cash distribution, may be subject to National Insurance Contributions under:

• Section 3 of the Social Security Contributions and Benefits Act 1992
• Section 3 of the Social Security Contributions and Benefits (Northern Ireland) Act 1992

The onward payment of compensation to directors, may be subject to tax under:

• Chapter 1, Part 2 Income Tax (Earning and Pensions Act) 2003
• Chapter 10, Part 2 Income Tax (Earning and Pensions Act) 2003
• Chapter 8, Part 5 Income Tax (Trading and Other Income) Act, 2005

Proposed revisions

Legislation will be introduced in Finance Bill 2023, which seeks to tax the corporate recipients, or those in receipt of the onward payment of the compensation, in a similar way to individual recipients.

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
empty	empty	empty	empty	empty	empty

The final costing will be subject to scrutiny by the Office of Budget Responsibility (OBR) and will be set out at the next fiscal event.

Economic impact

This measure will be formally assessed once costings have been certified by the OBR, but is not expected to have significant macroeconomic impacts.

Impact on individuals, households and families

This measure removes the charge to tax for compensation receipts for corporate entities and may have an impact on those individuals who receive an onward payment of compensation through their companies by cash distribution.

Customer experience is expected to remain broadly the same, as the measure does not alter how individuals interact with HMRC.

This is not expected to impact on family formation, stability or breakdown.

Equalities impacts

By removing the charge to tax for compensation receipts for corporate entities, the measure will provide clarity as to the tax treatment. It is not anticipated that there will be impacts on those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will have a negligible impact on a small number of businesses which are in receipt of a compensation payment from Post Office Ltd (POL) or the Department for Business and Trade (DBT), and their directors and shareholders, by removing these payments from corporate tax.

One-off costs may include familiarisation with the change so that the businesses impacted are aware that there is an exemption on their compensation payments. There are not expected to be any continuing costs or savings.

Customer experience is expected to remain broadly the same, as the measure does not alter how businesses interact with HMRC.

The measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

It is not anticipated that the publication of the draft legislation will have any operational impacts for HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through ongoing discussions with UK Government Investments (UKGI) and DBT to ensure the design of any future schemes are caught in any policy design. None of the formal evaluation principles apply.

Further advice

If you have any questions about this change, please contact the Business Profits Team email: businessprofits.admin@hmrc.gov.uk.