The City minister Lucy Rigby has been accused of ignoring taxpayers’ concerns after appearing to dismiss warnings about a £2bn tax loophole linked to the car finance compensation scandal.
Rigby, the City minister at HM Treasury, was urged to intervene after it emerged that major lenders involved in the scandal could legally avoid paying tax on compensation payouts, despite rules designed to prevent banks benefiting from corporate misconduct.
The issue was raised by Bobby Dean, a Liberal Democrat member of the parliamentary Treasury committee, after reports showed that banks including Barclays, Lloyds and Santander could sidestep the tax rules when compensating customers over mis-sold car finance agreements.
Under legislation introduced in 2015, banks are prevented from deducting compensation payments from their profits before calculating corporation tax. The measure was intended to ensure banks could not reduce their tax bills as a result of wrongdoing.
However, an investigation revealed that when compensation linked to the £11bn car finance scandal begins to be paid this year, many lenders will fall outside the scope of those rules. Motor finance divisions are registered as non-bank entities, even when they sit within larger banking groups, meaning they are exempt. Specialist lenders, including the finance arms of car manufacturers such as Honda and Ford, are also not covered.
The Office for Budget Responsibility has confirmed that the loophole could cost taxpayers £2bn over the next two years.
In a letter dated 29 December, Rigby confirmed that the existing legislation would not apply to many of the firms involved. “The bank compensation restriction does not apply to companies that are not banking companies, even if they are within banking groups,” she wrote.
She added that she and the chancellor, Rachel Reeves, wanted the redress process “resolved in a way that is efficient, orderly and provides certainty for both firms and consumers”, thanking Dean for “making me aware of these concerns”.
Dean criticised the response, saying it failed to address the scale of the problem. “This is a complete non-answer from the government,” he said. “Once again, they have chosen to side with the industry over consumers and taxpayers, just as they have done throughout the motor finance scandal.
“We hear from ministers over and over again about tough economic choices, but when big banks avoid £2bn in tax through a loophole, they refuse to take action.”
The Financial Conduct Authority closed its consultation on a proposed compensation scheme for car finance customers in mid-December. Its £11bn redress plan has faced criticism from both consumer groups and lenders, with the regulator expected to announce its next steps in February or March.
A Treasury spokesperson said: “It is vital that consumers have access to motor finance to enable them to spread the cost of a vehicle in a way that is manageable and affordable. We want to see this issue resolved in an efficient and orderly way that provides certainty for consumers and firms.”