Is the inflationary element of a compensation payment ‘interest’?

NHS Mid & South Essex ICB v Revenue and Customs [2024] UKFTT 1117 (TC) considers whether redress payments made to individuals who were wrongly treated as being ineligible for continuing healthcare included an element of ‘interest’ for income tax purposes.

A 2003 report into NHS funding for care costs concluded that criteria for patients’ eligibility had been mis-interpreted and mis-applied, resulting in compensation being provided to affected patients aimed at compensating them for the financial loss they had suffered. In calculating the amount of compensation due, an inflationary element was included based (in many cases) on the retail price index (RPI). 

This raised the question whether the payments of such compensation by the appellant companies (referred to as ‘ICBs’) included the payment of ‘yearly interest arising’, and therefore whether the payments should be subject to withholding tax. HMRC concluded they were and issued assessments accordingly. The burden of proof was on the ICBs to prove that this was not the case.

As part of their decision the First-tier Tribunal (the Tribunal) referred to various case law on the characteristics of interest – most notably Riches v Westminster Bank Ltd ([1947] AC 390), Re Euro Hotel (Belgravia) Ltd ([1975] STC 682) and Chevron Petroleum UK Ltd v. BP Petroleum Ltd ([1981] STC 689).

Key themes included that ‘interest’ is:

• Calculated by reference to a sum of money due to the person entitled to the alleged interest;
• Made according to time by way of compensation for the use of money; and
• Accrues at periodic intervals (but does not have to be paid at said intervals).

In addition, whether a payment is labelled as ‘interest’ is not determinative (although that may be informative as to its true underlying nature). Further, being aggregated with a payment of a different nature doesn’t necessarily prevent an amount from being ‘interest’.

The ICBs argued that since compensation would not be due to a patient until a decision on their eligibility was made, there was no entitlement to a debt or principal sum during the period on which the ‘interest’ arose. However, the Tribunal rejected this, referring to previous case law comments that it is immaterial whether the money was due under a contract, statute, or other reason in law. It concluded there was no requirement for a payee to have an ongoing entitlement to receive a payment from the payor, in order for compensation relating to the pre-entitlement period to be properly described as ‘interest’.

The Tribunal considered the RPI element of the payment was to compensate the patients from the time when their excessive payments were made, and distinguished this from Euro Hotel where the payments were considered to be for non-performance of an obligation (as opposed to payments by time for the use of money).

The Tribunal also concluded such amounts were ‘yearly’ interest (notwithstanding there being no obligation to pay the patient prior to a decision being made on redress), and so dismissed the appeal by the ICBs.

This case serves as a useful reminder that there is no statutory definition of ‘interest’ for tax purposes, and whether something is labelled as ‘interest’, and/or is part of a larger payment, does not preclude it being considered interest for tax purposes. This can have significant implications and highlights the need for companies to properly consider the position where a payment is being made or received that is to some extent based on the passage of time.

For further information please contact:

• Andy Watford
• Jeremy Wormald