Ministers are facing urgent calls to close a significant tax loophole that could allow banks and specialist lenders to sidestep approximately £2 billion in corporation tax related to the massive £11 billion car finance compensation scheme.
The £2 Billion Tax Relief Loophole
Under current UK law, operations that are not officially classified as banks can deduct compensation payments from their profits before calculating their corporation tax liability. This substantially reduces their tax bill. While high street banks have been blocked from claiming this relief since 2015, it has now emerged that their motor finance divisions and other specialist lenders involved in the scandal can exploit it because they are considered “non-bank entities.”
This group includes the car loan operations of major banking groups such as Barclays, Santander UK, and Lloyds Banking Group—the UK's largest car loan provider through its Black Horse division. Specialist lenders, including the financing arms of car manufacturers like Honda and Ford, also fall outside the 2015 taxation rule.
The Office for Budget Responsibility (OBR) has confirmed that this loophole will cost taxpayers an estimated £2 billion in lost corporation tax revenue over the next two financial years, 2025-26 and 2026-27.
Political Pressure and Industry Response
Bobby Dean, a Liberal Democrat MP serving on the Treasury committee, is leading the charge for the government to intervene. He argues that the spirit of the 2015 rule—designed to ensure taxpayers did not foot the bill for banking misconduct, as seen in the PPI scandal—must be upheld.
“It’s not right that the taxpayer is set to lose out on billions due to a loophole in compensation rules,” Dean stated. He plans to write to ministers this week, just before the Financial Conduct Authority's consultation on the compensation scheme closes.
The proposed FCA scheme aims to provide redress to borrowers who were overcharged due to unfair commission arrangements between lenders and car dealers. However, the Financing and Leasing Association (FLA), which represents car lenders, has pushed for the scheme's terms to be narrowed. Adrian Dally, the FLA’s director of motor finance, suggested that focusing the scheme only on proven loss would reduce its cost and, consequently, increase the corporation tax paid by lenders.
Broader Context and Government Stance
The issue adds another layer to the ongoing controversy surrounding the car finance scandal. Lenders have strongly resisted the anticipated £11 billion compensation bill and have actively sought government support. Earlier this year, Chancellor Rachel Reeves attempted to influence a Supreme Court hearing on the matter and was reportedly considering retrospective legislation had the court ruled in favour of consumers.
Darren Smith of claims firm Courmacs Legal, representing 1.5 million victims, criticised the situation: “Following a budget that will lead to millions of people’s tax bills going up, it’s hard to understand why the Labour government is not closing this loophole.”
When questioned, the Treasury did not directly address the tax relief issue. A spokesperson emphasised the importance of accessible motor finance and a resolution that provides “certainty for consumers and firms.”
