The City minister, Lucy Rigby, has been accused of neglecting taxpayer interests after appearing to dismiss serious concerns regarding a substantial £2bn tax loophole that benefits major banks embroiled in the ongoing car finance scandal. This controversy centres on how banks' motor finance divisions are structured, allowing them to circumvent tax rules designed to hold financial institutions accountable for misconduct.
How Banks Exploit Regulatory Gaps
Rules established in 2015 were intended to prevent banks from deducting compensation payouts from their profits before calculating corporation tax. This measure ensures that banks cannot reduce their tax liabilities, regardless of the financial repercussions of their own wrongdoing. However, a significant loophole has emerged, as revealed by recent investigations.
Banks' motor finance divisions are registered as "non-bank entities", even though they operate as integral parts of larger banking groups. This classification places them outside the scope of the 2015 rules, enabling lenders such as Barclays, Lloyds, and Santander to sidestep tax obligations on compensation related to the £11bn car loans scandal. Specialist lenders involved, including the finance arms of car manufacturers like Honda and Ford, are also exempt from these regulations.
Financial Impact and Political Backlash
The Office for Budget Responsibility has confirmed that this loophole will cost taxpayers an estimated £2bn over the next two years. This revelation prompted Bobby Dean, a Liberal Democrat member of the Treasury committee, to write to ministers urging immediate intervention. In his correspondence, Dean highlighted the urgency of addressing this issue to protect public funds and ensure corporate accountability.
Rigby's response, dated 29 December, acknowledged the concerns but confirmed that lenders involved in the car finance scandal would not be subject to the 2015 rules. She stated, "The bank compensation restriction does not apply to companies that are not banking companies, even if they are within banking groups." She concluded by thanking Dean for raising the issue and expressed a desire for the redress process to be resolved efficiently and orderly for both firms and consumers.
Criticism and Calls for Action
Dean criticised the government's response as a "complete non-answer", accusing ministers of consistently siding with the industry over consumers and taxpayers. He argued that while ministers frequently discuss tough economic choices, they refuse to act when big banks avoid £2bn in tax through this loophole. This sentiment echoes broader frustrations with the handling of the motor finance scandal, where consumer advocacy groups have also voiced concerns over fairness and transparency.
The Financial Conduct Authority closed its consultation on a proposed car loan compensation scheme in mid-December, with a £11bn plan that has faced criticism from both consumer groups and lenders. The regulator is expected to outline its next steps in February or March, adding to the ongoing debate about regulatory effectiveness and corporate responsibility.
Broader Implications for the Financial Sector
This situation raises important questions about corporate governance and tax fairness within the banking and automotive industries. The loophole not only impacts public finances but also undermines efforts to hold financial institutions accountable for misconduct. As the scandal unfolds, stakeholders are calling for stronger regulations to close such gaps and ensure that all entities within banking groups are subject to the same tax rules.
A Treasury spokesperson emphasised the importance of accessible motor finance for consumers but reiterated the need for an efficient and orderly resolution to the issue. This statement highlights the balancing act between supporting economic activity and enforcing tax justice, a challenge that continues to shape policy discussions in the financial sector.
