The Post Office Horizon scandal – what are the tax issues?
In the light of the media interest in the Post Office Horizon scandal, we look at the tax issues behind the compensation schemes to the affected postmasters.
The recent ITV drama Mr Bates vs The Post Office has raised awareness on the Horizon scandal, which affected postmasters across the UK. Over a period of years, more than 2,000 postmasters were prosecuted by the Post Office for theft or false accounting and many of those were wrongly sent to prison.
The prosecutions were based on information in the Horizon computer system used by Post Office branches throughout the country, which proved to be flawed. As the TV drama mentioned, many of these prosecutions have been quashed. In the last week, the Crown Office and Procurator Fiscal Service (Scotland) and Ministry of Justice (England and Wales) have made announcements in respect of quashing the remaining wrongful convictions of the Horizon scandal.
In recent years, compensation schemes have been put in place for those affected by the Horizon scandal to redress the financial loss. Interim payments were made (initially £100,000 but the limit was increased to £163,000), but in September 2023, the government announced all postmasters convicted based on Horizon evidence have been offered £600,000 to settle their claim for compensation. Where postmasters have received interim payments, these will be taken into account to bring the total payments up to the £600,000.
What are the tax implications of the Post Office compensation payments?
To assist postmasters affected by the Horizon scandal, HMRC has issued some guidance ahead of the 31 January filing deadline for self-assessment. Payments under the original Horizon Shortfall Scheme are subject to income tax and national insurance contributions, whereas payments in the Overturned Conviction scheme (previously the Overturned Historical Conviction scheme) and Group Litigation order scheme were exempt from income tax and national insurance and capital gains tax. The Autumn Finance Bill provides an exemption for corporation tax for corporate recipients of compensation, with a follow on income tax and capital gains tax exemption for where there is an onward payment of the compensation to an individual.
Because payments under the original Horizon Shortfall Scheme related to remedying shortfalls over several years, but the compensation was received in a lump sum, payments made to individual postmasters could push them into higher tax rates than they would otherwise pay.
In June 2023, the government announced top-up payments to address the differential in tax rates. Postmasters receiving the top-up payment could also claim up to £300 from Post Office Ltd for tax advice to assist them with their self-assessment tax returns. These top-up payments are exempt from income tax, national insurance and capital gains tax.
Issues with 2022/23 self-assessment tax returns
HMRC recognises the unique nature of the Horizon scandal and has set up a dedicated helpline to provide support to those affected. Tax writer and lecturer Rebecca Benneyworth has set up a website Postmaster's tax to provide free advice and support to postmasters with the tax issues under the various schemes.
Where a postmaster has already received a notice to file a 2022/2023 self assessment tax return, but isn’t able to file their tax return before the 31 January 2024 deadline as they haven’t resolved their compensation claim and received the top-up payment to settle the tax liability, HMRC will not charge the interest and penalties that would normally be charged for late filing or late payment.
If HMRC has not issued a notice to file a 2022/23 tax return but a postmaster has received a payment under the Horizon Shortfall Scheme, the postmaster should contact the dedicated support team in the first instance.
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