Mis-sold PPI compensation could trip up DIY tax return first-timers

People who have won compensation for mis-sold payment protection insurance (PPI) could be caught out by not declaring the interest on that compensation in their self-assessment tax return, warns ACCA (the Association of Chartered Certified Accountants).

The warning comes as hundreds of thousands of extra people are expected to complete the self-assessment tax return for the first time by 31 October with changes to the child benefit system and a rise in the number of self-employed driving up numbers of individuals who self-assess.

Chas Roy-Chowdhury, ACCA head of taxation, said: “While the PPI compensation itself is not taxed, any interest element awarded on that sum is taxable. Failure to declare that in the self-assessment form could lead to a knock at the door from HM Revenue Customs. It’s not obvious at all in completing the necessary forms.”

ACCA points out that current estimates put the total compensation paid out for mis-sold PPI at more than £10bn so far. However, the global accountancy body says that other factors will see more people complete self-assessment this year than ever before and could create a backlog for HMRC.

Chas Roy-Chowdhury said: “There are not only more self-employed people out there, but changes to the child benefit system also mean that a new wave of people will need to fill out the self-assessment form this year. We are talking hundreds of thousands. The deadline is not until 31 October, but if you get it wrong you could be penalised.

“Even those who have gone through the self-assessment process before will see some new elements to it, making what was originally meant to be an easy process much more complicated and vulnerable to mistakes. It’s not just completing the form that’s tough, its knowing what can and can’t go in that could trip you up. Self-assessment was supposed to be a DIY tax, but we are at a stage now where guidance from a finance professional may be a necessity to avoid the potential of being penalised for unpaid tax.”

ACCA points out that if you earn over £50,000 and continue to claim child benefit but do not complete a self-assessment form you could be liable, not only to repay part of all of the benefit claimed by way of a tax charge on the highest earner of the couple, but also interest and penalties on the tax unpaid.

Chas Roy-Chowdhury added: “There is another risk with the growing numbers facing the self-assessment maze this year and that is that HMRC has, like so many other public bodies, had to cut resources, which means if you call the taxpayer helpline you might find it much harder to get through than usual.”