Post Office Horizon compensation not taxable

Postmasters caught up in the Horizon accounting scandal are to be paid millions of pounds in additional compensation to offset tax bills

Sara White, Editor, Accountancy Daily

In total, an additional £26m will be paid to claimants through these top-ups which will be tax exempt.

The top-up payments will be exempt from income tax, capital gains tax and National Insurance contributions.

All postmasters in the Historic Shortfall Scheme will be given a top-up payment in addition to their compensation award as soon as the Post Office has calculated all the individual payments, the Department for Business and Trade confirmed.

Starting in the late 1990s, the Post Office prosecuted over 700 sub-postmasters who they falsely accused of manipulating their accounting systems. These systems were later found to be faulty and created errors when reporting turnover, which led to an overstatement of earnings.

The Post Office demanded sub-postmasters cover the shortfalls, and in many cases wrongfully prosecuted them between 1999 and 2015 for false accounting or theft.

The decision to include the tax allowance in the compensation packages follows many complaints that the compensation was taxable and was treated as income by HMRC.

‘The tax treatment of awards in the Historical Shortfall Scheme has, in some cases, had the effect of unfairly reducing the compensation received by postmasters, which these top-up payments will address,’ the government said.

Claimants will also be able to claim £300 of further support for tax advice, to help them when filing their tax returns.

The Historical Shortfall Scheme was set up in line with tax legislation and other commercial compensation schemes, with offers made on a gross basis and compensation then taxable. This allowed claims to be processed more efficiently without the need for postmasters to provide tax information, according to the government.

However, this approach did not account for the tax on compensation when paid as a lump sum, which meant that postmasters were not necessarily restored to the position they would otherwise have been in. Top-up payments are the quickest and most efficient way to address this issue, and will be exempt from tax.

Postal affairs minister Kevin Hollinrake said: ‘We are committed to ensuring that postmasters and their families receive the full and fair compensation they deserve for the pain and suffering caused by the Horizon scandal.

‘With these top-ups, we’re making sure that every penny stays in postmaster’s pockets where it belongs.’

The issue of taxation does not apply to the Group Litigation Order Scheme or the Overturned Convictions where there is a tax exemption in place.