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a; GOV.UK
Department for
Business & Trade
Correspondence
DBT response to the Post Office
Horizon IT inquiry's first interim
report: compensation
Published 26 October 2023
Contents
Introduction
Recommendations 1 and 3
Recommendation 2
Recommendation 4
Recommendation 5
Recommendation 6
Recommendation 7
Recommendation 8
Annex A: comparison between Horizon compensation schemes on tax
Annex B: summary of tax approach by scheme
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OGL
© Crown copyright 2023
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This publication is available at https://www.gov.uk/government/publications/response-to-post-
office-horizon-it-inquiry-interim-report-compensation/dbt-response-to-the-post-office-horizon-it-
inquirys-first-interim-report-compensation
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Introduction
1. The department welcomes the inquiry’s interim report of 17 July 2023. It
reiterates the intention, recognised in the report, that all postmasters
affected by the Horizon scandal should receive full, fair and prompt
compensation.
2. The following paragraphs set out the department’s response to the
report's specific recommendations.
Recommendations 1 and 3
The Horizon Compensation Advisory Board should not be prevented from
monitoring individual cases in which compensation has been or is to be
determined by paragraph 4 of its Terms of Reference. It must be one of the
core duties of the board that it monitors whether compensation payments
are full and fair.
The Horizon Compensation Advisory Board shall, as part of its advisory
role, consider whether, in its view, full and fair compensation is being paid
out to applicants under the 3 schemes. It shall advise the minister and the
Post Office accordingly at 3-monthly intervals.
3. Recommendations accepted in part
The advisory board’s aim is to help the department to ensure fair and
prompt compensation to postmasters affected by the Horizon scandal and
related issues. The department agrees that, in delivering this aim, it may be
helpful for the advisory board to be given anonymised information about
individual cases.
However, the department endorses the view expressed by the board, in the
report of its 31 July meeting and in its letter of 15 August 2023 to the inquiry,
that it would not be “possible or advisable for us to intervene in the
determination or outcomes of individual cases, nor to give an opinion on
individual outcomes, or an opinion that full and fair compensation is being
paid out to individuals”.
4. The Terms of Reference allow the advisory board to advise the minister
whenever it sees fit. Reports of its 6-weekly meetings are communicated to
the minister and published.
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Recommendation 2
The Horizon Compensation Advisory Board shall produce written reports in
respect of each of their meetings in relation to each of the 3 schemes and
publish the same within 21 days of the date of each meeting.
5. Recommendation accepted
Written reports of board discussions are already published at the Horizon
Compensation Advisory Board page
(https://www.gov.uk/government/groups/horizon-compensation-advisory-board).
Reports of earlier meetings are available at the Group Litigation Order
Compensation Scheme Advisory Board page
(https://www.gov.uk/government/groups/group-litigation-order-glo-compensation-
scheme-advisory-board).
They are issued within a week unless the board agrees otherwise.
Recommendation 4
If the Horizon Compensation Advisory board as constituted consider it
necessary, the number of persons appointed to the board should be
increased so as to ensure that the board has sufficient capacity to perform
the functions set out above.
6. Recommendation accepted
The department will keep under review the case for expanding the board, in
discussion with its current members.
Recommendation 5
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The Department for Business and Trade (DBT) shall take such steps as are
necessary within 28 days of the date hereof, to seek appropriate directions
under section 306 of the Insolvency Act 1986.
This is to enable a court to resolve the difference of view between DBT and
Moore UK and/or it shall take all appropriate steps, including providing
appropriate legal funding, so as to enable a sub-postmaster to seek
appropriate directions under that section.
7. Recommendation accepted
The department and the inquiry share the view that none of the group
litigation order (GLO) compensation payable to bankrupt claimants should
be diverted to insolvency practitioners to meet their costs and creditors.
Most insolvency practitioners have accepted this, but Moore UK, which is
the trustee in bankruptcy in respect of 9 GLO bankrupt claimants, have not.
1. The department has instructed counsel to submit an application on its
behalf for a direction from the court and has asked for this to be
expedited. The department will be asking one postmaster affected by
Moore’s stance to be named as an interested party without the need to
participate in proceedings themselves.
The department has written to affected postmasters to inform them about
the actions it is taking and reassure them that they will be fully
compensated.
Recommendation 6
DBT shall publish in as much detail as it reasonably can and as soon as it
reasonably can, its proposals for ensuring that applicants to all schemes are
treated equally and fairly. This is as far as their liability to or exemption from
Income Tax (IT), Capital Gains Tax (CGT) and Inheritance Tax (IHT) is
concerned as the same relates to compensation payments under each
scheme.
9. Recommendation accepted
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Payments under the GLO scheme and the compensation for overturned
convictions (OC) are exempt from IT, National Insurance contributions
(NICs) and CGT. On 19 June, the government announced arrangements for
ensuring fair treatment in respect of IT, NICs and CGT for Horizon Shortfall
Scheme (HSS) claimants.
Initial offers under HSS did not account for the tax on compensation when
paid as a lump sum, which means 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.
Details are set out in Annex A. Payments from all 3 schemes are exempt
from IHT.
Recommendation 7
HM Government shall bring forward and use its best endeavours to ensure
that legislation is enacted so as to allow payments of compensation under
GLOs to be made to applicants after midnight on 7 August 2024 if that
proves to be necessary.
10. Recommendation accepted in principle
The department is determined to deliver the GLO scheme by August 2024.
If it were to appear nearer the time that the deadline was likely to be
missed, the government would of course consider whether legislation was
necessary.
Recommendation 8
No applications for compensation to HSS shall be entertained after such
date as shall be agreed by the Minister/ DBT, the Post Office and the
Horizon Compensation Advisory Board.
11. Recommendation accepted in part.
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The department will discuss and agree an appropriate closing date with the
Post Office. Advice will be sought from the advisory board and the
department will notify the inquiry and potential claimants of the decision
when made.
Annex A: comparison between Horizon
compensation schemes on tax
1. This note provides further explanation of the tax treatment across the 3
compensation streams: OC, HSS and the GLO scheme.
2. Across all compensation streams, no claimants will pay more tax than
they would have at the time of the shortfalls. The intervention on HSS is
designed to put claimants in the fairest possible position as to their
counterparts in GLO and OC.
There will be some HSS claimants with no or litle current income who
receive more generous awards due to the assumptions made but we think
that the pragmatic solution that we have announced is the fairest, simplest
and fastest way to resolve the issue and ensure that postmasters receive
full compensation as soon as possible.
In summary:
* postmasters with OC or participants in the GLO scheme will not be
required to pay any IT, NICs, or CGT. This is because the award is
calculated net of tax, that is, an amount in respect of tax is deducted in
the calculation of the compensation award. The payments are not then
subject to IT, CGT and NICs
¢ postmasters participating in the HSS will be required to pay IT and NICs
on some elements of the compensation they receive. They will also be
required to pay CGT where relevant, but it is unlikely that any
compensation would attract CGT
e HSS claimants will receive an additional payment on top of their
compensation. This additional payment will compensate the postmaster
for any tax that they are liable to pay on their compensation above the
basic rate (20%). In practice, it will be more generous for postmasters
with little or no other income, who are less likely to pay tax at the higher
or additional rates as a result of the compensation payment
e the additional payment to HSS claimants will be tax exempt so there will
be no further tax or NICs to pay on this amount, making the top up
straightforward and final
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e the government will not collect any IHT that may arise in relation to
payments made under the HSS, the GLO scheme, and the OC scheme to
victims of the Post Office Horizon scandal
1. For each of the schemes, there are taxable and non-taxable elements.
For example, where the loss relates to what would have otherwise been
employment income, it is taxable. The Post Office and DBT seek to follow
the “Gourley principle”, which states that a person should not be placed in
a better or worse position than if the contract had been carried out.
2. The distinction between the schemes is the point when IT is applied to
relevant heads of loss. For postmasters with OC and those who were part
of the GLO, an amount in respect of IT is deducted as part of the
calculation of the award in the year in which it would have been earned to
provide a net figure. For example, gross earnings in each year are
identified and then tax deducted at the appropriate rate for that year.
Interest is then applied to the net figure. Combined these payments
constitute the compensation award. This award is tax exempt, meaning
there is no liability for the claimant to pay tax on the award received.
1. The methodology used to calculate payments is in adherence with the
Gourley principle. For example, if the claimant receives an award for loss
of earnings, this should reflect the amount they would have received if
they had continued to work as a postmaster and paid tax on their
earnings over the years.
This is consistent with the objective to put claimants back in the financial
position that they would otherwise have been in.
1. On the HSS, loss of earnings awards are based on the gross
remuneration that the postmaster would have expected to have received
from the Post Office. IT is then due to HM Revenue & Customs (HMRC)
in the year the compensation is paid.
Post Office has rightly withheld IT from the award, although this may not
match the postmaster’s actual liability. This approach allowed the Post
Office to make awards under the scheme without requiring detailed tax
information from the claimant.
However, Post Office and government recognise this regrettably did not fulfil
the Gourley principle for some claimants because the lump sum payment
means they are in higher tax brackets than they might otherwise have been
if they had received the earnings over a number of years.
1. This would have created a discrepancy between the HSS and the
GLO/OC schemes whereby, if tax arrangements were left as they were
originally designed, HSS claimants would have been subject to higher tax
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bills than if the HSS scheme was designed in the same way as the other
schemes.
2. Addressing this discrepancy is difficult given the large number of
compensation awards that have already been made under the HSS.
Whilst including HSS in the regulations to exempt GLO and OC from IT,
NICs and CGT, would have created parity of tax treatment in theory, it would
not have created parity in outcomes between the schemes because of the
different way in which awards are calculated.
Introducing an exemption for the HSS would mean HSS claimants receive a
gross award which is subject to no IT, putting them in a better position than
their counterparts in the other schemes.
1. This is why the top-up solution was favoured, to make sure that whilst
HSS claimants are still liable to pay some tax on their gross
compensation awards this top-up will make this commensurate with what
they are likely to have paid at the time of employment, an application
closer to the Gourley principle.
An explanation was previously provided by the department on how the top-
ups would be calculated and the rationale behind it. This is repeated below
for ease: Top-up payments will therefore be calculated so that no
postmaster pays more than the basic rate of tax on their compensation.
This is in line with the intention to restore the postmaster to the position they
would have been in if they had kept their jobs and received remuneration
and paid tax in the normal way.
It will be assumed that the taxable elements of the compensation will be
subject to the additional rate of tax (45% in England, Wales and Northern
Ireland, 47% in Scotland). The top up payment will then be for the difference
between the compensation taxed at the additional rate and the
compensation taxed at the basic rate. These additional payments will be
exempt from IT, CGT and NICs.
For example, if the taxable amount of compensation was £100,000, Post
Office will assume that, due to the postmaster’s other earnings, this will be
taxed at 45%. Our intention is for the recipient to be treated as if they were
taxed at the basic rate (20%).
The top up would therefore be for £25,000 — the difference between
£45,000 of assumed IT and £20,000 of IT. This example is for illustrative
purposes and does not account for any allowances that the postmaster may
have, including the termination allowance.
Further to this, for taxable interest applied to non-taxable heads of loss (for
example, Horizon shortfalls), a different approach will be taken. We don’t
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think it is right that this element of compensation should be taxed and
therefore we will issue a top up payment which will cover any subsequent
tax bill to the postmaster.
Top ups will be calculated to account for the difference between the
additional rate of tax and 0% to mitigate the impact of tax entirely.
In the above example, this would mean a £45,000 top-up, assuming all the
£100,000 is interest on non-taxable heads of loss. This is consistent with
the OHC and GLO, where the tax exemption means that interest applied to
non-taxable heads of loss is also exempt from IT, CGT and NICs.
1. There are a small number of sub-postmasters who have structured their
business through a corporate entity, these businesses are within the GLO
and HSS compensation frameworks.
The government announced draft legislation at legislation day on 18 July
2023, which sets out the proposed remedy for corporate entities, which
aims to create a similar level of taxation as if the compensation had been
paid directly to the directors, employees or shareholders of the corporate in
an individual capacity.
1. Compensation for postmasters with OC and the members of the GLO,
are also exempt from CGT. This exemption does not extend to HSS but
as CGT is primarily applied to profit from the sale of an asset,
compensation payments are unlikely to be subject to CGT.
2. There is consistency of treatment between all 3 schemes on IHT. The
government has already legislated to exempt payments made to
claimants under OC from IHT and has announced its intention to legislate
to exempt from IHT payments made under the HSS and the GLO
scheme.
To ensure that HSS and GLO claimants have certainty over their tax
position prior to legislation being introduced, HMRC will not collect any IHT
in relation to payments made up to the date the legislation comes into force.
Any IHT paid by the personal representatives of estates who did not
previously qualify for relief from IHT on HSS and GLO scheme payments
are entitled to a refund from HMRC.
Annex B: summary of tax approach by
scheme
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Overturned Group Horizon shortfall
convictions litigation scheme
order
Calculation of Net Net Gross
awards
Shortfalls Not taxable Not taxable Not taxable
Personal losses Not taxable Not taxable Not taxable
(for example,
personal injury)
Loss of earnings Taxable Taxable Taxable (taxed on
(deducted in (deducted in final award)
calculation) calculation)
Compensatory Not taxable Not taxable Taxable (interest
interest (3.45% (interest added (interest added to gross
compound) to net award) added to net award, taxed on
award) final award)
Income Tax and Not payable Not payable Payable
National Insurance (exempt) (exempt)
contributions on
final award
Inheritance Tax Not payable Not payable Not payable
(exempt) (exempt) (exempt)
Capital Gains Tax Not payable Not payable Not exempt but
(exempt) (exempt) compensation is
unlikely to attract
CGT
Top-up payments Not payable Not payable Payable
(exempt from IT,
NICs, IHT and CGT)
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