The ITV drama about the Post Office scandal has brought a long-running saga to the forefront of the public imagination.

Broadcast in the first week of January, Mr Bates vs the Post Office shone the spotlight on the human cost of the fiasco that saw hundreds of sub-postmasters wrongfully prosecuted for theft, fraud and false accounting.

An inquiry is ongoing into the saga of the Post Office and its faulty Horizon IT system. And now Prime Minister Rishi Sunak has called the scandal “one of the greatest miscarriages of justice in our nation’s history”. The Government has promised the victims swift exoneration and compensation.

But it’s important to consider the tax implications for sub-postmasters receiving compensation. And the tax issue is further complicated by the fact there are different compensation schemes.

Horizon Shortfall Scheme

The Horizon Shortfall Scheme (HSS) – previously known as the Historical Shortfall Scheme – was put in place by Post Office Ltd to compensate sub-postmasters who, while not subject to criminal conviction, made good the apparent losses caused by the Horizon system from their own pockets. The scheme’s design meant the original HSS compensation payments are subject to income tax and National Insurance contributions (NICs).

Then, in June 2023, the Government announced sub-postmasters in the HSS would receive top-up payments to ensure the amount of compensation they received wouldn’t be unduly reduced by tax. These top-up payments are exempt from income tax, capital gains tax and NICs.

These sub-postmasters would also receive £300 to pay for independent advice on filing their tax return.

And the HSS is exempt from inheritance tax.

New guidance on the Horizon Shortfall Scheme

HMRC has published new guidance for any sub-postmasters who received HSS compensation between 6 April 2022 and 5 April 2023, and are waiting for top-up payments to cover any tax liability.

If they don’t receive their top-up payment in good time to file their self-assessment tax return before 31 January 2024, they won’t have to pay any late filing or late payment penalty or interest.

Plus, affected sub-postmasters can call a specialist HMRC team on 0300 322 9625. The support line is open Monday to Friday, from 8am to 6pm.

Group Litigation Order compensation scheme

The Group Litigation Order (GLO) scheme is an ex gratia claims-based scheme for sub-postmasters who were part of the Alan Bates and Others v Post Office Ltd action, and who don’t have a Horizon-related conviction.

Payments made under the GLO compensation scheme cover loss of earnings and interest. These payments are exempt from income tax and capital gains tax, as well as inheritance tax, and are disregarded in the calculation of benefits.

Other compensation schemes

There are other compensation schemes in relation to the Post Office saga, such as Overturned Convictions compensation payments.

My advice for sub-postmasters caught up in the Post Office scandal

After the stress of going through the process of obtaining compensation, it’s important to understand whether your compensation is taxable or not. The last thing you need when you’ve already suffered enough is to be chased by HMRC.

Guidance for accountants and tax agents

Given there are different compensation schemes, it’s crucial you understand the scheme under which your client has been compensated. You can then apply the correct tax treatment.

What lessons can we learn from the saga?

It’s extremely sad that an error in accounting software was allowed to lead to such trauma.

And while it’s vital that thorough testing of any systems takes place moving forwards, it’s inevitable IT systems will suffer bugs and failures. So, the crucial thing is to ensure innocent people don’t suffer because of such issues..

Compensation tax advice

For advice on compensation and tax, talk to our team on 07813 434195 or email stephanie.churchill@churchilltaxation.co.uk

Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation