Key Takeaways
- In Simon Hackett & Anor v The Commissioners for HMRC [2026] UKUT 00036 (TCC), the Upper Tribunal held that HSBC basic redress for mis-sold interest rate hedging products was taxable income.
- The basic redress was taxable because it replaced payments that the brothers’ property rental business had deducted as expenses.
- Calculating redress by reference to a cheaper alternative hedge affected only the amount of the payment. It did not turn the payment into non-taxable compensation for a lost opportunity.
- The decision concerned basic redress only. Consequential loss and redress interest need their own analysis based on what each payment replaced.
- Settlement wording, bank calculations, hedge documents, accounts and tax returns are the evidence that decides what each payment replaced.
- Arguments held back until late in an appeal may never be heard, as the brothers found when they tried to rely on ESC D33.
- Go Legal is rated Excellent with over 300 five-star reviews and 5/5 on Trustpilot and Google, placing our solicitors among the best-reviewed litigation lawyers in England and Wales.
Is Basic Redress for Mis-Sold Interest Rate Hedging Products Taxable Income?
Basic redress for a mis-sold interest rate hedging product (IRHP) can be taxable income where it replaces payments the business has already deducted as expenses. That is the effect of Simon Hackett & Anor v The Commissioners for HMRC [2026] UKUT 00036 (TCC), in which the Upper Tribunal (Tax and Chancery Chamber) dismissed the brothers’ appeal and confirmed that their HSBC basic redress was chargeable to income tax.
Under the Financial Conduct Authority (FCA) review and redress scheme, a redress package had three elements:
- Basic redress, which repaid amounts paid under the mis-sold product, less anything the customer would have paid under a suitable alternative.
- Consequential loss, covering a separate financial loss the customer could prove.
- Interest on the redress.
The labels do not settle the tax position. What matters is what each payment replaced.
Only HSBC’s basic redress was in issue. The Hacketts separately recovered consequential loss from HSBC, but that payment was not part of the appeal. The decision therefore does not decide how consequential loss or interest should be taxed.
What Is the Background to Simon Hackett and Edward Hackett v HMRC?
How did mis-sold hedging products affect a property rental business?
Simon Hackett and Edward Hackett were brothers who jointly bought three interest rate hedging products in connection with bank loans for their property rental business.
HSBC sold them two products, on 27 January 2006 and 15 May 2006. Each was a Libor cap with a knock-in floor, intended to manage changes in the interest payable on their loans. They paid upfront premiums for both. They bought the first because a loan condition required a hedge. They chose to buy the second themselves. RBS sold them a third product in August 2006, but the RBS redress was treated as taxable in their returns and was not in dispute.
The products worked within a range:
- Until late 2008, the base rate was above the ceiling, so HSBC made payments to the brothers.
- When the base rate fell below the floor, the brothers made substantial payments to HSBC.
They deducted those payments as expenses when calculating their property business profits. That deduction later became decisive.
How was the redress calculated?
The FCA agreed a review and redress scheme with nine banks, including HSBC and RBS. Its stated aim was to put customers back in the position they would have been in had the mis-sale not occurred. The scheme allowed three basic redress outcomes:
- A full refund of all payments where the customer would never have bought a hedge.
- No redress where the customer would have bought the same product or suffered no loss.
- The difference between payments under the actual product and those under an alternative, where the customer would have bought a different product.
As non-sophisticated customers with structured collars, the brothers were automatically entered into the redress phase. HSBC found that product 1 had been mis-sold, principally because non-sophisticated customers had been sold a complex product without adequate explanation of its features, risks, potential exit costs and alternatives. It concluded that they would instead have taken a 5% base-rate cap for £1.5 million, maturing on 27 January 2013.
HSBC offered £571,071.59 in cash. That figure was the difference between the premium and payments actually made under product 1 and what the brothers would have paid under the replacement cap. HSBC reached the same conclusion for product 2, even though the brothers had identified the need for that hedge themselves.
Why did the settlement wording matter?
HSBC’s offer letter of 6 June 2014 stated that the redress was in full and final settlement of claims to recover all or part of the payments made under the reviewed products. Acceptance prevented proceedings to recover those payments but did not affect a separate consequential loss claim.
HMRC issued closure notices amending each brother’s return for the tax year ended 5 April 2015, treating the HSBC basic redress as taxable income. The First-tier Tribunal (FTT) dismissed their appeals, holding that the redress compensated them for business expenditure they would not otherwise have incurred. They appealed to the Upper Tribunal.
If HMRC has questioned your treatment of a redress payment, our solicitors can review the settlement documents and business records before any response is sent. You can book a free consultation or call 0207 459 4037.
What Issues Did the Appeal Raise About IRHP Mis-Selling Compensation Tax?
The Upper Tribunal had to decide five questions.
1. What was the basic redress paid for? The brothers argued it compensated them for a lost opportunity: the chance to take a suitable alternative product and benefit from falling rates. HMRC argued it compensated them for payments actually made under the mis-sold products, with the alternative product relevant only to calculating the amount.
2. Was the basic redress chargeable to income tax? HMRC said it replaced deductible business expenditure and was therefore an income receipt. The brothers said compensation for lost opportunity costs was not taxable.
3. Was the FTT’s decision invalid because its conclusions did not follow logically from its findings? The brothers presented this as an error of formal validity, separate from an ordinary challenge to factual conclusions. HMRC said it was either an Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 challenge or no recognisable error of law at all.
4. Did the FTT answer the right question? The brothers argued the FTT should only have tested whether HMRC’s closure notice conclusions were logically valid. HMRC argued the statutory question was whether the brothers had been overcharged.
5. Could a new argument be raised mid-hearing? At the start of their reply on the second hearing day, the brothers sought to argue that the redress might be a non-taxable capital receipt under the extra-statutory concession ESC D33. HMRC objected that the point was late and had never been argued before the FTT.
What Did the Upper Tribunal Decide on the Tax Treatment of IRHP Compensation?
The Upper Tribunal found no error of law in the FTT’s decision and dismissed the appeal. The HSBC basic redress remained taxable income.
Basic redress compensated payments made, not a lost opportunity
The Tribunal applied the first stage of London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772: what was the compensation paid for?
Three points answered that question:
- The offer letter. HSBC described the redress as settling claims to recover payments made under the products.
- The scheme structure. The FCA scheme kept basic redress separate from consequential loss. Lost opportunity costs belonged in consequential loss, where the customer had to prove concrete opportunities they would probably have taken.
- The burden of proof. For basic redress, the bank had to support its conclusion that the customer would have bought an alternative. If basic redress compensated a lost opportunity, the burden would logically have fallen on the customer.
The Tribunal held:
“The compensation is for the customer’s liability to make payments under the terms of the Mis-sold product that they would not, but for the mis-sale, have made.”
The alternative product changed only the size of the payment:
“The only relevance of the alternative product is in terms of calculation of the amount of compensation”
In other words, it went to quantum. The Tribunal also noted that the brothers had told HSBC they would not have entered into any hedge at all, which sat uneasily with their later claim to have lost the opportunity to buy one, though this was not material to the result.
The Tribunal found the brothers had confused an economist’s idea of opportunity cost with the accounting and tax rules governing compensation:
“A lost opportunity cost is a theoretical cost which is not an accounting entry.”
It also rejected the argument that the loss was zero once loan interest savings were set against the hedge payments, because the FCA calculation did not take the loan interest into account in that way.
Basic redress was an income receipt of the property business
The second stage of Attwooll, as extended by Deeny and others v Gooda Walker Ltd (in voluntary liquidation) and others (Inland Revenue Commissioners third party) and related appeals [1996] 1 STC 299, asks how the replaced item would have been taxed. Compensation for a liability to pay a revenue expense is treated like the expense it replaces.
The brothers had bought the hedges as part of their property rental business and properly deducted their payments against profits. The redress replaced those deductible revenue expenses. It was therefore an income receipt of the business, chargeable to income tax under the Income Tax (Trading and Other Income) Act 2005. Sections 34, 271, 272 and 288 were not in dispute.
| Case | Facts | Outcome | Why It Matters |
|---|---|---|---|
| Simon Hackett & Anor v The Commissioners for HMRC [2026] UKUT 00036 (TCC) | Brothers received HSBC basic redress after deducting payments under mis-sold hedging products from their property business profits. | Basic redress was an income receipt, chargeable to income tax. | What the payment replaced mattered, not the alternative product used to calculate it. |
| London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772 | Characterisation of compensation for tax purposes. | Compensation replacing a sum that would have been income is taxed the same way. | Identify what a payment replaces before deciding how it is taxed. |
| Deeny and others v Gooda Walker Ltd (in voluntary liquidation) and others (Inland Revenue Commissioners third party) and related appeals [1996] 1 STC 299 | Compensation for a liability to pay a revenue expense. | The Attwooll principle applies equally to replaced deductible expenditure. | Compensation for deductible business costs may be taxed as income. |
The “logical invalidity” challenge failed
The Tribunal held that an alleged contradiction between findings and conclusions is either an Edwards v Bairstow challenge, where an appeal court may intervene only if no properly directed tribunal could have reached the decision, or a complaint about insufficient reasons. There is no separate category of logical invalidity. The Tribunal found the FTT’s conclusions were open to it and reached the same conclusions itself.
It criticised the brothers for extracting isolated findings and subjecting them to economic, mathematical and linguistic analysis, holding that “a roving selection of evidence or island hopping is not permissible” and that “the decision needs to be read as a whole”.
The FTT answered the right statutory question
HMRC issued the closure notices under section 28A of the Taxes Management Act 1970. Section 31 gives the right of appeal against a closure notice, and section 50 governs how the tribunal decides that appeal. The Tribunal held that alleging HMRC’s conclusion was invalid does not change the tribunal’s task, which is to decide whether the taxpayer has been overcharged. The brothers had never challenged the validity or timing of the closure notices. Their real complaint was that the assessments should be reduced to nil, and the FTT had properly decided that question.
The ESC D33 argument was refused
The Tribunal refused permission to raise ESC D33 because:
- the application came at the eleventh hour without notice;
- no good reason was given for the delay;
- the point was not a pure question of law;
- HMRC had had no opportunity to take instructions;
- no application under the concession had ever been made to HMRC; and
- HMRC’s exercise of discretion under an extra-statutory concession can only be challenged by judicial review, not by appealing a closure notice.
What Does This Decision Mean for Businesses, Landlords and Tax Advisers?
Property businesses and traders who received redress
Businesses that deducted hedging payments against taxable profits should not assume later compensation is capital or tax-free. Where redress replaces deducted expenses, part of it may be owed to HMRC. Treating the whole sum as available cash can leave a shortfall when the tax falls due, and an incorrect return can lead to an HMRC closure notice that is hard to resist without the original records.
Customers negotiating or reviewing a redress settlement
HSBC’s description of what its offer settled was significant evidence of the payment’s character. Anyone still negotiating a mis-selling settlement should seek documents that state separately:
- what the basic redress compensates for and how it was calculated;
- whether consequential loss was assessed separately;
- whether interest is identified separately; and
- whether any payment covers tax arising from the redress, and who bears that risk.
A genuine lost-opportunity claim belongs in consequential loss and needs concrete evidence. It will not be inferred from the bank’s use of an alternative product.
Recipients of consequential loss or redress interest
Hackett decided only the tax treatment of HSBC basic redress. Consequential loss and interest may have a different purpose, and each needs to be matched to what it replaced. Applying one tax treatment to an entire package without that analysis risks either overpaying tax or under-declaring income.
Taxpayers and representatives in HMRC disputes
The case is a warning about tribunal strategy. Challenges should be built on a recognised error of law and on reading the decision as a whole. New points should be raised early, and any concession-based argument needs a prior application to HMRC. The Tribunal also described the brothers’ allegations of misrepresentation and falsification against HMRC as indecorous and found HMRC had acted entirely professionally, so unsupported accusations can damage credibility.
Banks and HMRC
For banks, the decision shows how much weight offer wording carries. For HMRC and tax advisers, it confirms the two-stage Attwooll approach: identify what the compensation was for, then apply the tax character of the item it replaced. The calculation method is relevant evidence but not conclusive.
Our solicitors advise businesses and individuals on HMRC enquiries, closure notices and disputes arising from financial product settlements. If you want your redress package tested element by element, book a free consultation.
Frequently Asked Questions
Get Expert Help With Interest Rate Hedging Product Tax Disputes
Simon Hackett and Edward Hackett v HMRC confirms that the tax treatment of IRHP compensation depends on what each payment replaced, not on its label or the method used to calculate it. Where basic redress reimburses previously deducted business expenses, it is likely to be taxable income, and late or novel arguments are unlikely to rescue a weak evidential position.
Our solicitors review redress offers, settlement agreements and calculation methods, compare them with how the original hedge payments were treated, and advise on HMRC enquiries, closure notices and tribunal appeals. We also advise on tax-risk wording when settling financial mis-selling claims and represent clients where negotiation fails. To discuss your position, book a free consultation or call us on 0207 459 4037.
