Ministers Urged to Close £2bn Tax Loophole in Car Finance Scandal
A tax loophole is allowing non-bank motor finance arms involved in a major car finance scandal to deduct compensation payouts from their profits, potentially resulting in about £2 billion in tax relief over the 2025-26 and 2026-27 fiscal years. This issue arises from the £11 billion car loan compensation scheme under the Financial Conduct Authority (FCA), which targets lenders who overcharged customers due to unfair commission arrangements. However, some lenders' motor finance units, including those of large institutions like Barclays, Santander UK, and Lloyds (Black Horse), are treated as non-bank entities, enabling them to benefit from this relief.
Since 2015, banks have been blocked from claiming these deductions, but this rule does not apply to non-bank motor finance operations such as those within specialist lenders and the lending arms of car manufacturers like Honda and Ford. The Office for Budget Responsibility has estimated this loophole could lead to a £2 billion loss in tax revenue if compensation payouts remain deductible for corporation tax.
Liberal Democrat MP Bobby Dean has called on the government to extend the 2015 taxation rule to motor finance payouts to prevent taxpayers from indirectly subsidising misconduct. Meanwhile, the FCA’s motor finance compensation scheme is currently out for consultation, aiming to compensate borrowers who were overcharged. The Financing and Leasing Association has argued that the scheme's terms should be narrowed to focus only on actual losses. They claim this approach would reduce the financial burden on lenders and enhance the impact of VAT and tax on profits.
