London: George Osborne, the UK chancellor, has been called upon to clarify when banks might use costs relating to misconduct and regulatory payments to offset their tax bills.

Andrew Tyrie, the Conservative chairman of the Treasury select committee, has written to Osborne to demand more details on the issue after the government stressed last year that compensation paid out to customers for incidents such as the mis-selling of payment protection insurance could not be used by banks to reduce their tax bills.

There is also a general principle under UK tax law that misconduct fines should not be used to reduce corporate tax. There are, however, other payments that banks make to regulators both at home and abroad where the law is not clear, Tyrie argued.

“Banks should pay for the full cost of their misconduct. It would be wholly unacceptable if taxpayers, having bailed out the banks in 2008, were to find themselves partly responsible for paying the banks’ fines,” Tyrie said.

His letter asks for clarification in areas including so-called Section 166 reports. These are ordered by the Financial Conduct Authority’s supervisors when they suspect a firm has weaknesses in areas such as governance, financial crime and IT. The firms typically have to pay for the investigations — even if no breach is found — which are led by independent experts such as accountants or lawyers and can cost upwards of £100,000 (Dh532,330). The cost for larger financial institutions is typically in the millions of pounds.

Tyrie argues in the letter that if 166 reports lead to no enforcement action from the FCA then they should be tax-deductible.

There is also the issue of whether so-called deferred prosecution agreements and non-prosecution agreements in the US — where a company admits wrongdoing, pays a fine and installs a monitor — can be offset against tax in the UK. They are expressly not tax-deductible in the US but there is a question over whether companies that enter into the agreements in the US could still use them to reduce their UK tax bill, according to Tyrie’s letter.

Banks around the world have paid roughly $150 billion (Dh550.95 billion) in misconduct fines since the financial crisis — roughly the same as the amount by which they have had to bolster their balance-sheets over the same period through tougher capital rules — which the Bank of England estimates translates to about $3 trillion of reduced lending capacity to the wider economy.

Meanwhile, fines levied by the FCA now go to the Treasury rather than back to the watchdog, which is funded by the firms it regulates rather than by the taxpayer. The Libor and foreign-exchange rigging scandals resulted in a total of £2 billion of penalties going to the Treasury in this way.

— Financial Times