Currently, customer compensation payments are generally treated as deductible expenses for corporation tax purposes, reflecting the fact that these payments are non-punitive and often the straightforward reimbursement of income upon which businesses have already been taxed.

However, the large compensation payments that banks have made in relation to the mis-selling of payment protection insurance (PPI) and interest rate hedging products (IRHP) have had a direct impact on banks’ post-crisis corporation tax payments.

As a result, the government says that existing tax rules in this area have become unsustainable.