The government is under increasing pressure to shut down a major tax loophole that could allow car finance firms to claim back billions in tax relief on compensation payouts. The calls come as the UK prepares to deal with an estimated £11 billion in redress linked to mis-sold car finance [1], including thousands of personal contract purchase (PCP) claims.

As the car finance scandal continues to unfold, concerns are mounting that companies involved in mis-selling could benefit again, this time by using existing tax rules to reduce their financial losses.

Worries Grow Over Tax Relief on Compensation

At the heart of the issue is how compensation for car finance claims will be treated for tax purposes. The Financial Conduct Authority (FCA) is finalising a redress scheme [2] that will address years of complaints from drivers who believe they were misled into car finance agreements they did not fully understand.

Many of these agreements involve PCP deals, where customers say they were not told how their interest rates were set or how much commission brokers were earning behind the scenes. These arrangements led to higher repayments, often without the borrower’s knowledge.

Now, attention has turned to whether the firms responsible for this mis-selling will be able to write off compensation payments as a business expense, reducing the amount of corporation tax they owe.

Could Taxpayers End Up Covering the Cost?

The concern is that many of the companies involved in the car finance scandal operate through non-bank finance arms. Unlike high street banks, these businesses are currently allowed to deduct compensation payouts from their profits before tax is applied.

This tax break was removed for banks in the aftermath of the PPI scandal. However, the same rule does not yet apply to non-bank lenders, which could leave the Treasury with a gap in expected revenue. It is estimated that this loophole could cost up to £2 billion over the next two years if left unchanged [3].

With billions expected to be paid out to customers through the FCA’s redress scheme, critics argue that allowing tax relief in this context risks shifting part of the financial burden from lenders to taxpayers.

Redress Scheme Moves Ahead, But Questions Remain

The FCA has said it will restart complaint handling for car finance claims from 31 May 2026 [4]. This will apply to new complaints as well as those submitted during the current pause, which began in January 2024 to allow for a full review of the market.

As the complaints process reopens, many drivers will be watching closely. Thousands of people who believe they were mis-sold car finance are hoping for answers and, in many cases, financial compensation. A large number of these complaints relate to PCP claims, where customers say they were not clearly told how their interest rates were set or how broker commissions affected what they paid overall.

The redress scheme is designed to help resolve these long-standing issues, but one big question remains: who will actually foot the bill of car finance compensation claims? There are growing concerns that finance firms may end up using tax relief to lessen the cost of a car finance refund. This has led to renewed calls for ministers to act and make sure the companies involved do not benefit financially while drivers are still waiting for fair treatment.

Public Scrutiny Increases

The car finance mis-selling scandal has drawn widespread attention as more people come forward with concerns about how their finance agreements were structured. What began as individual car finance claims has now become one of the largest investigations of its kind in the UK.

For drivers, this is about fairness and transparency. Many feel they were not given enough information at the time of purchase, prompting for a car finance refund check and are now seeking redress for deals that cost them more than they expected.

For the government, the pressure is on to ensure that the companies paying out compensation for mis-sold car finance do not receive unintended tax advantages in the process. With the public closely watching how the car finance scandal is handled, ministers face a crucial decision on whether to close the tax loophole before redress payments begin.

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References:

1. the UK prepares to deal with an estimated £11 billion in redress linked to mis-sold car finance - https://www.fca.org.uk/publication/corporate/motor-finance-consultation-analyst-briefing.pdf
2. The Financial Conduct Authority (FCA) is finalising a redress scheme - https://www.fca.org.uk/news/statements/fca-consults-motor-finance-compensation-scheme
3. The loophole could cost up to £2 billion over the next two years if left unchanged - https://www.theguardian.com/business/2025/dec/06/ministers-urged-to-close-2bn-tax-loophole-in-car-finance-scandal
4. The FCA has said it will restart complaint handling for car finance claims from 31 May 2026 - https://www.fca.org.uk/news/statements/pause-motor-finance-complaints-handling-lift-31-may-2026