The Foskett Panel - Explanation of Tax on Panel Awards

Tax - Explanation of tax covered and not covered by LBG on Panel Awards

For most Customers, Panel Awards are split into two parts:
- The Non-Compensatory Interest Rate part
- The Compensatory Interest Rate part
We explain each of these terms below and summarise briefly the tax implications:

Non-Compensatory Interest Rate part

This part of the award is calculated to compensate the Customer for the additional income such as salary or dividends (or other forms of earnings or capital gains) that the Panel have concluded the Customer would, or could, have had in the absence of the IAR Fraud.
The award to the Customer is calculated net of any tax that the Customer would have had to pay on the income if it had been received at the time.
For example, if the Panel conclude that a Customer lost their job because of the IAR Fraud and the job paid a salary of £50,000 a year, the amount of the award would be the lost earnings from that job on a take-home basis, i.e. after deductions for employment taxes. Therefore, if the Panel assumed the Customer would have paid tax of £15,000 a year had they received that salary, the Panel Award will reflect an annual loss to the Customer of £35,000 a year (being £50,000 salary less £15,000 tax). If the job was lost for 10 years, the total Non-Compensatory Interest Rate part of the award would be £350,000 (£35,000 per year x 10 years).
The Tax Award will be calculated with the intention that, after paying the tax calculated to be due to HMRC on receipt of this Non-Compensatory Interest Rate part of the award, the Customer will be left with the amount calculated by the Panel. So, if the Panel consider, based on the HMRC Guidelines, that the Customer must pay 45% tax on this part of their Panel Award, LBG will pay the Customer an amount equal to the tax calculated to be due on the Non-Compensatory Interest Rate part of the Award so that the amount retained by the Customer will be equal to the Panel Award for losses.

Continuing our worked example, we illustrate below how the Customer retains the Panel Award of £350,000 after paying the 45% tax to HMRC:

Illustrative example of Panel Award showing tax elements
		£
Lost annual salary (gross)	A	50,000
Deductions for employment taxes on lost salary	B	(15,000)
Lost annual earnings on a take-home basis	A – B = C	35,000
Non-Compensatory Interest Rate part of Award (based on 10 years of lost earnings)	C x 10 = D	350,000
45% tax calculated by Panel on Non-Compensatory Interest Rate part	D x (45/55) = E	286,364
Tax Award payable by LBG to Customer	E	286,364
Total Non-Compensatory Interest Rate part of Award (including Tax Award) paid by LBG to Customer	D + E = F	636,364
Less: 45% tax payable by the Customer to HMRC on the Award	F x 45% = E	(286,364)
Net Non-Compensatory Interest Rate part of Award retained after tax paid	F – E = D	350,000

It should be highlighted that the Panel will be required to interpret the HMRC Guidelines and conclude how they should be applied in each Customer’s case. It is impossible for the Panel to eliminate uncertainties over the proper tax treatment of awards or guarantee how HMRC may exercise any discretion it is given, given this is outside of the Panel’s control.

Compensatory Interest Rate part

The lost income for which the Customer is being compensated would typically relate to an historical period given that the IAR Fraud took place many years ago. Where the Panel concludes a Customer has lost income at the time of the IAR Fraud, the consequence of this is that they will have also lost the use of that income over the relevant period (i.e. up to the date that the Award is paid). The Panel’s approach to this and the Compensatory Interest Rate applied are explained further here (‘under ‘Quantifying D & C losses’).
The Compensatory Interest Rate is a simple interest rate of 8%, which is the usual gross rate of interest on compensation applied by the Financial Ombudsman Service, which notes on their website, “In most cases, we think a rate of 8% simple per year is appropriate to reflect the cost of being deprived of money in the past” noting that this is same interest rate that the courts would normally award, and taking into account that the rate is “gross before tax is deducted”.
A Customer is liable for the tax on receipt of this component of the award, just as they would be for any other kind of bank interest or other interest on compensation that they might receive.

LBG, when paying the Panel Award, is obliged to withhold tax at 20% of the Compensatory Interest Rate part of a Customer’s award. LBG will pay this 20% withholding tax directly to HMRC on behalf of the Customer. Most Customers will be liable for tax at a rate higher than 20% (up to 45% (if the amount received in that tax year takes them above the additional rate threshold)). The Customer will be informed of the tax paid and will be responsible for paying the remainder of any tax due on the Compensatory Interest Rate part to HMRC.

For example, if the Panel conclude the lost income suffered by the Customer was £2 million and the Compensatory Interest calculated on that lost income was £1 million, the Customer would receive the following amounts (tax amounts shown are approximate and for illustrative purposes only):
£	Non-Compensatory Interest Rate part	Compensatory Interest Rate part	Total
Panel Award	2,000,000	1,000,000	3,000,000
Plus Tax Award (assuming 45% tax)	1,636,364		1,636,364
Less 20% tax on Compensatory Interest Rate part withheld by LBG		(200,000)	(200,000)
LBG pays to Customer in total (for Panel Award and Tax Award)	3,636,364	800,000	4,436,364

In this simplified example the Customer would be responsible for paying tax to HMRC of £1,636,364 on the Non-Compensatory Interest Rate part, for which funding will have been received from LBG. The Customer is also responsible for paying the additional tax due on the Compensatory Interest Rate part over and above the £200,000 paid by LBG to HMRC on their behalf.

Continuing our worked example, assuming tax of £450,000 in total is due on the Compensatory Interest Rate part (which is 45% of £1,000,000) the Customer must pay the remaining £250,000 due to HMRC (being the total tax due of £450,000 less the £200,000 withheld by LBG). The tax due on this part is not funded by LBG and must be covered by the Customer.
As explained in our guidance on the process for claiming your Tax Award (under ‘Payment of tax to HMRC by the Customer’ – here), the precise amount of tax due to HMRC may differ from the amount of the Tax Award calculated by the Panel as the Panel will make certain (favourable) assumptions, such as the applicable rate of taxation on the Re-Review receipts, in the absence of information about the Customer’s other taxable income and circumstances. The Customer may need support from a tax adviser to reflect the Tax Award in the amounts to be included in their self-assessment tax return and this is provided for in the funding arrangements - here.