The Labour government is facing mounting pressure to close a significant tax loophole that could see the Treasury lose around £2 billion in corporation tax revenue from the ongoing car finance mis-selling scandal.
The £2 Billion Tax Relief Loophole
Under current rules, any financial operation that is not classified as a bank can deduct compensation payments from its profits before calculating its corporation tax liability. This legal provision effectively reduces their tax bill. While UK banks have been blocked from claiming this relief since 2015, it has emerged that motor finance arms—often structured as "non-bank entities"—are still eligible.
These companies are central to the pending £11 billion car loan compensation scheme, meaning they could exploit this loophole for payouts related to historic misconduct. The Office for Budget Responsibility (OBR) has confirmed that the loophole is expected to cost taxpayers £2 billion over the next two years.
Political and Industry Reaction
Bobby Dean, a Liberal Democrat MP serving on the Treasury committee, is urging ministers to intervene. He argues that the spirit of the compensation rules is being undermined.
"It’s not right that the taxpayer is set to lose out on billions due to a loophole in compensation rules," Dean stated. "The UK banned banks from deducting payouts from tax bills for good reason and it seems that those caught up in the motor finance scandal are going to dodge their responsibilities by operating through spin-off companies."
Legal representatives for affected consumers have also voiced strong criticism. Darren Smith, managing director of claims firm Courmacs Legal, which represents 1.5 million victims, questioned the government's inaction following a budget that raised taxes for millions.
From the finance industry, Adrian Dally, director of motor finance at the Finance & Leasing Association (FLA), suggested an alternative approach: "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."
Government Stance and Next Steps
When approached for comment, the Treasury did not directly address the issue of tax relief. A spokesperson emphasised the importance of consumer access to motor finance and a desire for an efficient resolution.
"It is vital that consumers have access to motor finance to enable them to spread the cost of a vehicle in a way that is manageable and affordable," the spokesperson said. "We want to see this issue resolved in an efficient and orderly way that provides certainty for consumers and firms."
The central question now is whether the Labour government will move to amend the rules, ensuring that all entities paying redress for the car finance scandal are treated equally and that the £2 billion in potential lost revenue is reclaimed for the public purse.
