Mis-selling Could Be A Big Problem for the Chancellor

24th February 2025

According to Treasury officials, the car loan mis-selling scandal could create a £5.5bn gap in Britain's public finances.

The lenders involved may seek to offset compensation payments against their corporate tax bills, leading to reduced public revenue.

This £5.5bn estimate represents potential lost tax receipts. Last week, the Supreme Court blocked Chancellor Rachel Reeves' attempt to intervene in an Appeal Court case, which had ruled that paying commission to dealers without full customer consent was unlawful.

Analysts predict that if the Supreme Court upholds the lower court's decision, the impact could surpass that of the Payment Protection Insurance (PPI) scandal, which cost around £50bn. During the PPI scandal, then-Chancellor George Osborne prevented banks from deducting payments from their tax bills, helping maintain corporation tax receipts.

The Treasury believes that this precedent means bank-owned car finance firms cannot offset payments against their tax bills. However, the Treasury could still face a significant reduction in tax revenues from most of the 7m outstanding car loan agreements by "non-bank" lenders.

On Friday, it was revealed that tax receipts were £4.6bn less than expected. The Office for National Statistics (ONS) reported a monthly surplus of £15.4bn, below the Office for Budget Responsibility's (OBR) forecast of £20.5bn. Despite this, it was the highest monthly surplus since records began in 1993.

Borrowing reached £118.2bn in the financial year to date, nearly £13bn more than the OBR forecast in October, marking the fourth highest figure at this point in the year. This raises concerns that Chancellor Rachel Reeves may need to raise taxes again next month, despite promises in the last Budget that her hikes were a ‘one-off.’

With the OBR’s updated economic forecasts on the horizon, Reeves has vowed to ensure public spending does not exceed tax receipts and has revised the Government’s fiscal rules to include a £9bn ‘buffer.’ However, this buffer is now believed to be wiped out.