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HMRC internal manual

Banking Manual

Bank compensation restriction: introduction: overview of the legislation

CTA09/S133A – M says no deduction is allowed for compensation expenditure incurred by banking companies in relation to conduct issues which are disclosed in accounts or other relevant document.

The rules apply when the disclosure condition is met and the company was a banking company at the time of the conduct giving rise to the compensation. However, it does not apply when the compensation expenses are excluded expenses.

In certain circumstances the restriction will also apply when compensation is paid to the customer by a different company to the one that had the misconduct issue, known as the qualifying company. This applies when the company paying the compensation is associated to the qualifying company.

  • compensation means both the cost of compensation to customers as well as interest payable (see BKM202100)
  • the meaning of customer is considered at BKM202200
  • conduct is any act or omission and includes any conduct after 29 April 1988 which gives rise to compensation (BKM202300)
  • some conduct expenses are excluded from the restriction (BKM203100)  
  • the disclosure condition is considered in detail in BKM204100
  • see BKM207100 for the definition of a banking company
  • see BKM208100 for the definition of a qualifying company

Where a company has expenses disallowed, an amount equal to 10% of the disallowance is brought into account as a receipt to reflect the associated costs of verifying, processing and paying the compensation (see BKM205100).

The legislation applies to compensation expenses incurred on or after 8 July 2015 (see BKM209100).

BKM206100 considers the tax treatment where a provision is made in a year and is later unwound.