Tax treatment of mis-selling redress payment

The taxpayers were a married couple who ran a nursing home in partnership. They took out an interest rate hedging product (IRHP) with a bank for a loan used to buy a home and deducted the premiums as business revenue expenses. In 2016 after a review of IRHPs by the Financial Conduct Authority they received a redress payment for mis-selling of the product. They did not include the amount on their tax returns. HMRC considered tax was due and issued discovery assessments. It also imposed penalties.

The taxpayers appealed. They were in dispute with the bank about the compensation and believed the tax would be paid when that was resolved. They later accepted the assessments but said the penalties should be cancelled because they had a reasonable excuse. The taxpayers had attended a conference where a boutique tax consultancy created to assist business owners mis-sold IRHPs had said tax...