UK Ministers Urged to Close £2bn Tax Loophole in Car Finance Compensation Scheme
UK ministers are being urged to close a £2bn tax loophole that could allow motor-finance payouts to avoid corporation tax under the upcoming £11bn car loan compensation scheme. Currently, non-bank entities can deduct compensation payments from profits before tax, while banks have been blocked from doing so since 2015. However, motor-finance arms linked to banks can still claim this relief, potentially enabling major lenders such as Barclays, Santander UK, Lloyds Banking Group (via Black Horse), and specialist lenders including lending arms of Honda and Ford to dodge tax on compensation payouts.
The Office for Budget Responsibility has estimated that this loophole could cost taxpayers an estimated £2bn in lost corporation tax over the financial years 2025-26 and 2026-27. The compensation scheme is designed to reimburse borrowers who were overcharged due to unfair commission arrangements between lenders and car dealers.
Liberal Democrat MP Bobby Dean has called for government intervention to apply the 2015 rule—which barred tax relief for bank payouts—to payments related to car loan mis-selling. Dean emphasised the importance of preserving the spirit of the compensation rules.
The Treasury declined to comment specifically on the tax-relief issue but stated that its goal is to provide accessible motor financing and to ensure an orderly resolution for consumers and firms involved. Meanwhile, the Financial Conduct Authority’s consultation on the compensation scheme remains open with submissions due by Friday.
The Financing and Leasing Association has argued that the scheme's terms should be narrowed to focus strictly on actual losses, aiming to reduce the scale of both payouts to consumers and tax relief claimed by lenders.
