Interest penalty and tax return

talexuser

I had a Coventry regular saver when it was worthwhile, and closed it for the new Santander since a much better option now. The terms included a penalty of 30 days interest for early closure which was still worth paying in terms of changing to the increased rates.

My interest was ~£22 and the penalty around £7 which made the actual interest ~£15.
Coventry have sent me a closing statement with the £22 interest and no mention of the penalty!
I assume this is the figure HMRC will obtain so will effectively pay tax on a part interest never paid. How can this be right?

LeafGreen

I suspect the answer is that the penalty is considered a charge completely separate to the interest amount.  

Interesting point though and one that I might need to consider myself when calculating whether it's worth cashing in accounts early.  Fortunately in your case it seems like it will be a very small financial hit.

ColdIron

I guess the £22 interest was earned and will be reported. The penalty is a separate charge so while your net gain is £15 your interest is £22

The terms included a penalty of 30 days interest

Are you sure the T&Cs did say a penalty equivalent to 30 days interest

talexuser

A very good legal point, the wording is

"will be a charge equal to 30 calendar days’ interest on the amount withdrawn"

now equivalent implies it is the "same" as interest and therefore should not be reported as a gain, but equal to implies that it a seperate figure calculated to be the same as interest and therfore you have lost out?

Obviously my amount is negligible but there is an important issue of principle here since large amounts could be taxed on non existent figures?

eskbanker

Seems to me that you're overthinking it - you earned £22 interest and, separately, there was an effectively unrelated early withdrawal penalty charge that happened to be calculated from the interest rate, so reporting the interest as £22 to HMRC is correct.

talexuser

Ok, in that case you could be charged tax on an amount never received which seems against natural justice?

eskbanker

talexuser said:

Ok, in that case you could be charged tax on an amount never received which seems against natural justice?

No, as per the statement you were issued with, you did receive £22 interest, and the fact that you separately paid £7 to close the account early is irrelevant to the taxation situation - you've convinced yourself that you should be able to offset one figure against the other to give a net taxable figure but the penalty charge isn't 'negative interest' in the way you believe....

[Deleted User]

See what your next tax interest certificate for this account says when you get it, and that's the figure HMRC will expect you to use.

However, you could try to argue (if needed) that the interest penalty is an effective reduction in interest and should reduce the tax. If going down this route and you use the lower figure, I would expect HMRC are unlikely to bother you for a few pounds, but if you want to be whiter than white, give them a call and ask them before filing your return (or however you report your interest). The call will be recorded and you can rely on what they tell you (even if it's wrong) so there'd be no risk of any penalties for misstating your interest.

wmb194

talexuser said:

Ok, in that case you could be charged tax on an amount never received which seems against natural justice?

It's analogous to selling a corporate or government bond during its term. The interest you received is taxable but the commission you paid to the broker to sell them isn't tax deductible and not even against CGT - as it would be with shares - as bonds are exempt. Sometimes the law just doesn't give you a break.

[Deleted User]

wmb194 said:

talexuser said:

Ok, in that case you could be charged tax on an amount never received which seems against natural justice?

It's analogous to selling a corporate or government bond during its term. 

Not really...check https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440 if you want to investigate this further.

wmb194

Deleted_User said:

wmb194 said:

talexuser said:

Ok, in that case you could be charged tax on an amount never received which seems against natural justice?

It's analogous to selling a corporate or government bond during its term. 

Not really...check https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440 if you want to investigate this further.

I don't understand, you're going to have to spell it out for me. I'm really referring to the non-tax deductible commission for selling the bond being similar to the non-deductible fee for early closure.