Ministers are facing urgent calls to close a significant tax loophole that could allow UK banks and specialist lenders to sidestep approximately £2 billion in corporation tax on compensation payments linked to the widespread car finance mis-selling scandal.
The £2bn Tax Relief for Non-Bank Entities
Under current UK law, businesses that are not classified as banks can deduct compensation payments from their profits before calculating their corporation tax liability, thereby reducing their overall bill. While high street banks have been blocked from claiming this relief since 2015, it has now emerged that many lenders involved in the impending £11 billion car loan compensation scheme can exploit this rule. This is because their motor finance divisions are legally considered "non-bank entities."
This group includes the car loan operations of major banking names such as Barclays, Santander UK, and Lloyds Banking Group—the UK's largest car finance provider through its Black Horse division. Specialist lenders, including the financing arms of car manufacturers like Honda and Ford, also fall outside the 2015 taxation rule.
The Office for Budget Responsibility (OBR) has confirmed that this loophole will result in the Treasury losing out on £2 billion in corporation tax revenue over the next two financial years, 2025-26 and 2026-27.
Political Pressure and Industry Lobbying
Liberal Democrat MP and Treasury committee member, Bobby Dean, is leading demands for the government to intervene. He argues that the spirit of the 2015 rule—introduced to ensure taxpayers did not foot the bill for banking misconduct, as seen in the PPI scandal—must be upheld.
"It’s not right that the taxpayer is set to lose out on billions due to a loophole in compensation rules," Dean stated. He plans to write to ministers this week, just before the Financial Conduct Authority's consultation on the compensation scheme closes.
The controversy provides further relief for banks, which recently avoided a proposed tax raid in the autumn budget following intense sector lobbying. Darren Smith, managing director of claims firm Courmacs Legal, which represents 1.5 million claimants, criticised the situation: "Following a budget that will lead to millions of people’s tax bills going up, it’s hard to understand why... big banks [can] profit from a £2bn tax break for their own historic misconduct."
Regulatory Battle and Scheme Details
The compensation scheme, currently under consultation by the Financial Conduct Authority (FCA), aims to provide redress to borrowers who were overcharged due to unfair commission arrangements between lenders and car dealers. However, the motor finance industry continues to challenge the expected £11 billion bill.
The Financing and Leasing Association (FLA) lobby group has pushed for the scheme's terms to be narrowed. Adrian Dally, the FLA's director of motor finance, commented on the tax issue, suggesting: "Focus the scheme on loss, therefore it’ll cost less than proposed. That will have less of an impact on profits and lenders will pay more corporation tax as a result."
Chancellor Rachel Reeves has previously attempted to influence the scandal's direction, including considering retrospective legislation to aid lenders if the Supreme Court had ruled against them. The court ultimately largely sided with the lenders.
When questioned, the Treasury did not directly address the tax relief loophole. A spokesperson said: "We want to see this issue resolved in an efficient and orderly way that provides certainty for consumers and firms."
