Chester Lettings Limited v HMRC [2026] UKFTT 614 (TC) – decided 21 April 2026 – delivers a brutal reminder: that payout might be taxable income, not capital. The First-tier Tribunal dismissed the appeal, upholding HMRC’s closure notice taxing £100k redress (plus interest) as a non-trading loan relationship (NTLR) credit. This isn’t academic; it’s a direct hit for any business with legacy hedging mis-selling claims.
The Backstory: IRHP Mis-Selling Wave
Between 2001-2010, banks like Clydesdale pushed complex IRHPs – collars, swaps, caps – onto SMEs alongside loans. When rates crashed post-2008, these blew up, locking firms into overpayments. The FCA’s 2013-2019 redress scheme compensated thousands, with £2.2bn paid out by 2016 (FCA data here). Chester Lettings, a property firm, got £100k “basic redress” in 2019 for excessive payments under embedded IRHPs, plus £650k debt reduction.
They treated it as capital, citing Extra-Statutory Concession (ESC) D33 for mis-selling compensation. HMRC disagreed via closure notice: taxable under CTA 2009 loan rules. Tribunal heard 10 March 2026, Judge Natsai Manyarara ruling 21 April. Deloitte’s 1 May briefing flagged it immediately.
Tribunal’s Core Rulings
Revenue, Not Capital: Applied the badges-of-trade test from London & Thames Haven Oil Wharves v Attwooll [1966]. Redress compensated deductible revenue expenses (IRHP payments), not a capital asset or lost opportunity. Calculation – difference between actual and ‘but for’ payments – screamed revenue. Source (mis-selling) irrelevant; tax follows nature (full judgment summary).
Loan Relationship Link: IRHPs embedded in loans triggered CTA 2009 s302 – NTLR credits on termination/restructure. Interest portion? Time value compensation, taxable per Westminster and Chevron. No escape.
ESC D33 Fails: Tribunals can’t enforce concessions; anyway, it’s income, not capital gain.
Cited precedents: Spencer, Deeny, Gadhavi, Wilkinson, Hackett, Euro Hotels. No HMRC win was inevitable, but clarity hurts.
CFO Implications: Audit Your Redress Now
If your firm got IRHP redress post-2019, check tax treatment. Many self-assessed as capital, but Chester says rethink. Exposure? £100k at 25% corp tax = £25k, plus interest/penalties. Multiply by portfolio size.
Broader Hedging Risks: Active swaps/caps? Termination credits/debits hit P&L under IFRS9/FRS102. Mis-selling claims ongoing? Document as revenue. Banks dragged feet; FCA extended reviews to 2021 (FCA IRHP page).
PE/M&A Angle: Buyer due diligence must probe legacy IRHPs. Warranties won’t cover tax recharacterisations years later. Seen it sink deals.
Practical Playbook for CFOs
- Review Returns: Pull 2019-2026 CT returns. Flag IRHP lines. Amend if needed (12-month window usually).
- Quantify Exposure: Basic redress + interest = revenue. Debt reductions? Case-by-case.
- HMRC Dialogue: Voluntary disclosure mitigates penalties (up to 100% for careless errors).
- Risk-Adjust Hedging: Post-Chester, model tax on unwind. Stress-test at 19-25% corp rates.
- Board Report: Quantify contingent liability. Auditors love tribunal precedent.
Compare Tax Journal analysis: “NTLR netbook treatment standard.” Or AccountingWeb: “CFOs facing unexpected bills.” Claritax echoes.
Lessons Beyond IRHPs
Tribunals prioritize statutory rules over equity. Cashflow excuses? Irrelevant – pay taxes first. Chester director paid himself £192k amid defaults elsewhere; here, redress funded operations. HMRC’s lens: revenue nature trumps story.
Link to rising corp tax (25% from April 2023). Hedging now strategic tax shields – but unwind bites. See PwC on hedging tax risks.