Payments made under the Windrush Compensation Scheme will be exempt from income tax, inheritance tax and capital gains tax, HMRC has announced
The change in policy is intended to give certainty to claimants and representatives acting on behalf of the estate of an individual regarding tax on compensation payments made to victims of the Windrush scandal. It also includes a provision to make it easier to exempt future compensation schemes by making regulations in a statutory instrument.
The 2018 scandal involves people from Caribbean countries who arrived in the UK prior to 1973 as members of the ‘Windrush generation’. Thousands of them were wrongly detained, denied legal rights, threatened with deportation and in some cases deported by the Home Office. A National Audit Office report found that the Home Office was aware of ‘credible information’ about possible problems, failed to consider the unfair consequences of its ‘hostile environment’ policy and ignored a 2016 recommendation to ‘cleanse’ a list of people wrongly identified as illegal immigrants.
Immigration records for the Windrush generation are sometimes incomplete because children travelled on their parents’ passports and the Home Office destroyed millions of historic landing cards in 2010 against the advice of senior immigration officers.
The Windrush Compensation Scheme was established in April to compensate individuals for losses incurred from not being able to demonstrate their immigration status. HMRC says up to 30,000 individuals may be eligible for compensation, although not all of these payments would be taxable.
HMRC says compensation payments cover fees for unsuccessful immigration applications, loss of income from and denial of access to the labour market (including self-employment), denial of access to social security benefits, denial of access to services, impact on daily life and incorrect detention, removal and ability to return to the UK.
While compensation payments are often made entirely free of tax there are circumstances where income tax, inheritance tax or capital gains tax may apply. Compensation for the fees relating to unsuccessful immigration applications or impact on normal daily life will not be subject to income tax whereas payments made to reinstate taxable social security benefits or in respect of a terminated employment could be taxable without this exemption.
Payments for loss of income will be calculated by reference to the amount that would have been received after tax and National Insurance contributions, ensuring that recipients are in no better position than if they had received money at the time.
All types of payments could be subject to inheritance tax or capital gains tax if they exceed thresholds without this exemption.
The Chartered Institute of Taxation (CIOT) welcomed the policy change. John Bunker, chair of CIOT’s succession taxes sub-committee, said: ‘This is a sensible move from the government to help those receiving payments under the Windrush Compensation Scheme. It is also encouraging to see that the bill proposed by the government will make it easier in the future for payments of this kind to be made tax-free, without the need for fresh legislation.’
The government will introduce legislation in the Finance Bill 2019-2020 to exempt Windrush compensation payments from taxation, back dated to 3 April 2019 when the compensation scheme was launched.
The impact on tax receipts will be around £5m a year, HMRC estimates. The final costings will be scrutinised by the Office for Budget Responsibility and reported in the Budget 2019.
Tom Reeve | 17-07-2019