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HMRC internal manual

Savings and Investment Manual

Interest: interest payable from the Financial Services Compensation Scheme: types of financial products and payments taxable as interest

Financial products and payments included in Section 380A ITTOIA 2005

ITTOIA05/S380A does not apply to all compensation paid by the FSCS. The definition of payment representing interest is given in S380A (2) and from this definition we can establish a number of criteria. These are that:-

  • interest would have been paid to the recipient but for the financial institution being declared in default;
  • the compensation is being paid by the FSCS because of the default; and
  • the payment representing interest is calculated in the same way as the interest would have been had it been paid to the recipient.

So the return on the financial product would have originally been paid in whole or in part in the form of interest. For example the financial product could be an interest bearing bank account or bond. The payment representing interest paid by the FSCS must be calculated in the same way as the interest on the original financial instrument.

As long as the payments are made under the FSCS it does not matter that the funds that the FSCS is using to make the payment are not from its own resources or from the FSCS levy. If the FSCS makes payments on behalf of a third party for example another regulatory authority or on behalf of the Treasury, as long as the payments are made under the FSCS then they will be within S380A.