Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Banking Manual

Bank compensation restriction: excluded expenses: expenses in respect of loss or damage attributable to third party - examples

Example 1

Bank K has 10 million customers in the UK with online accounts. Over the course of the year, almost all of these customers receive phishing emails, and some customers inadvertently hand over their account details. In some of these cases, third parties are able to access bank accounts and withdraw funds. Bank K compensates all customers for any such losses, and in the year ended 31 December 2015 this compensation totals £15m.

Although the cases are arguably linked, and the sum may be sufficiently material to be disclosable, it is not the intention of the legislation to disallow expenses in this situation. The compensation would remain allowable for tax purposes.

Example 2

Bank L offers a range of products to its customers. One of these products allows customers to swap fixed rate loans for floating rate loans, or vice versa. The rates customers pay are dependent on the bank’s activities in the financial markets.

One of the bank’s employees manipulates the rates that customers pay, in order to hit his sales targets. Following a regulatory investigation, the bank is required to compensate the affected customers.

If the compensation is material enough to be disclosable, and the other tests are met, then these compensation expenses will be disallowed.