Tax on interest not received because of early closure penalty

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  • Reed_Richards
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    spider42 said:

    If you decide to deduct the penalty charge for the amount of interest when you declare the interest, then is absolutely is under reporting. It is is fraud. It is tax evasion. The rules in this case (although not in every case) are absolutely black and white.

    I have closed many a savings account without ever getting a tax certificate at the end and have had to go online to look up the final balance and interest on closure.  Most of the financial institutions I have used don't immediately delete the details of the closed account but some do, or did.  I don't recall that I ever encountered this particular situation of an early closure with penalty (for a non-ISA account) which may be just as well because hitherto I always thought that this was a loss-of-interest penalty.  So I would possibly have wrongly declared the interest, directly in my case but to my accountant or tax advisor if I had one.  Unwitting under reporting; a good thing it never happened.      
    Reed
  • Kim_13
    Kim_13 Posts: 2,489 Forumite
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    Wouldn’t it depend on how the provider themselves accounted for the penalty? 

    I have never paid a penalty so cannot say for certain that providers do vary but in relation to other aspects of account operation, we do get posts here along the lines of provider A does X and provider B does Y. 

    Theoretically there would be the following possibilities: 

    a) There is already accrued interest in the account and the provider takes the penalty from this before adding any final amount due and closing the account. You would pay tax on the penalty money as it was already reported as interest before you took the penalty. 

    b) Interest has so far not been applied to the account and the provider takes the penalty before applying what is left as interest. You don’t pay tax on the penalty money, as HRMC never sees the extra interest. They don’t know what rate interest is paid at after all, only how much the provider pays you. 

    c) Interest hasn’t yet been applied to the account but the entries that are made on the account are for interest being credited in full and the penalty being deducted after that. You would pay tax on penalty money, as it was visible as interest first.

    A and C seem more likely to me. A might also happen with the as yet uncredited interested being retained for the penalty and the remainder taken from the account balance, which would reduce the tax slightly if it was handled as in scenario B rather than C. 

    Of course most accounts that allow early access/closure in exchange for a penalty are ISAs so there would be no tax to pay unless you had subscribed to a Fixed Rate ISA which was later deemed invalid. 

  • talexuser
    talexuser Posts: 3,499 Forumite
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    I had already acknowledged the legal position in my first post but will make a last two points. In all of this I repeatedly and politely asked the Build Soc to just add one line to the interest statement declared to HMRC simply saying a penalty of X was applied, this obvious step would have solved the whole thing, but nowadays a big corporation does not pay any attention to a single customer.

    Secondly on the personal issue of HMRC declaration, I calculate the penalty difference not declared represented 0.012% of interest declaration and 0.0006% of my total tax bill. If HMRC want to persue me they are very welcome, while we remain the money laundering capital of the world.
  • eskbanker
    eskbanker Posts: 31,451 Forumite
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    talexuser said:
    I had already acknowledged the legal position in my first post but will make a last two points. In all of this I repeatedly and politely asked the Build Soc to just add one line to the interest statement declared to HMRC simply saying a penalty of X was applied, this obvious step would have solved the whole thing, but nowadays a big corporation does not pay any attention to a single customer.
    But even if the BS had been able and willing to do so, HMRC wouldn't be interested in the scale of the penalty, as it doesn't affect tax liability, so that wouldn't have been obvious or have solved anything?

    talexuser said:
    Secondly on the personal issue of HMRC declaration, I calculate the penalty difference not declared represented 0.012% of interest declaration and 0.0006% of my total tax bill. If HMRC want to persue me they are very welcome, while we remain the money laundering capital of the world.
    whataboutery
    noun BRITISH
    the technique or practice of responding to an accusation or difficult question by making a counter-accusation or raising a different issue.
  • masonic
    masonic Posts: 23,473 Forumite
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    edited 15 November 2023 at 6:25PM
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    Kim_13 said:
    Wouldn’t it depend on how the provider themselves accounted for the penalty? 

    I have never paid a penalty so cannot say for certain that providers do vary but in relation to other aspects of account operation, we do get posts here along the lines of provider A does X and provider B does Y. 

    Theoretically there would be the following possibilities: 

    a) There is already accrued interest in the account and the provider takes the penalty from this before adding any final amount due and closing the account. You would pay tax on the penalty money as it was already reported as interest before you took the penalty. 

    b) Interest has so far not been applied to the account and the provider takes the penalty before applying what is left as interest. You don’t pay tax on the penalty money, as HRMC never sees the extra interest. They don’t know what rate interest is paid at after all, only how much the provider pays you. 

    c) Interest hasn’t yet been applied to the account but the entries that are made on the account are for interest being credited in full and the penalty being deducted after that. You would pay tax on penalty money, as it was visible as interest first.

    A and C seem more likely to me. A might also happen with the as yet uncredited interested being retained for the penalty and the remainder taken from the account balance, which would reduce the tax slightly if it was handled as in scenario B rather than C. 

    Of course most accounts that allow early access/closure in exchange for a penalty are ISAs so there would be no tax to pay unless you had subscribed to a Fixed Rate ISA which was later deemed invalid. 

    The accounting could be relevant, but ultimately it would be the T&Cs that would dictate whether accrued interest was forfeit or a penalty was applied. I gave the example of the First Direct Regular Saver as one where the interest is applied at a different rate for the whole period, and so the headline rate is never paid and only what is received at closure is taxable. It would be in the gift of the provider to arrange things in a way that was tax-efficient for the saver, but as they want to discourage people opting for early access, I doubt it is a priority for them.
    Remember that HMRC "sees" what the bank tells them, so just because interest and penalty haven't been itemised in the statement in (b), it doesn't mean the bank won't report all of the interest if the account terms are that no interest itself is forfeit, but instead a penalty is applied for early closure.
    I also second Reed's frustration about providers not sending tax certificates routinely. It is fortunate that the OP got one.
  • talexuser
    talexuser Posts: 3,499 Forumite
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    whataboutery
    noun BRITISH
    alt: forgetting that other people are actually allowed to have an opinion different to one's own. :)



  • eskbanker
    eskbanker Posts: 31,451 Forumite
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    talexuser said:
    whataboutery
    noun BRITISH
    alt: forgetting that other people are actually allowed to have an opinion different to one's own. :)
    I wasn't challenging your opinion that "we remain the money laundering capital of the world", but just highlighting the whataboutery of citing something irrelevant to the matter under discussion!
  • talexuser
    talexuser Posts: 3,499 Forumite
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    I don't think its irrelevant to the point in the thread to declare an interest amount to HMRC without the penalty under discussion and the infinitesimally small chance of being challenged on a tiny, tiny discrepancy of a large 5 figure tax bill compared to what else goes on (let alone Covid loans etc) but there again, that's a personal opinion.
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