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The Post Office claimed tax relief on compensation it paid to victims of the postmasters scandal, sparking warnings that it risks a £100mn bill and insolvency if authorities rule the move unlawful.

In its latest accounts, the Post Office included provisions for £435mn in remediation costs and compensation to former sub-postmasters who “repaid” money for thefts they did not commit because of flawed data from Fujitsu’s Horizon software.

Less than a week after the ITV drama Mr Bates vs The Post Office was broadcast, triggering national outrage, UK Prime Minister Rishi Sunak said he would put forward unprecedented legislation to quash the wrongful convictions of more than 700 former sub-postmasters.

Compensation of at least £600,000 had previously been offered to every sub-postmaster whose conviction was overturned. Only 93 convictions have so far been quashed.

Research by think-tank Tax Policy Associates has shown that the Post Office has historically claimed tax deductions for compensation payments.

While businesses can claim corporate tax deductions for legitimate business expenses, costs related to penalties or fines are not generally tax deductible.

Dan Neidle, tax lawyer and founder of Tax Policy Associates, estimated that if HM Revenue & Customs ruled against the Post Office, it could have “underpaid corporation tax by over £100mn, and may no longer be solvent”.

The think-tank said that the tax treatment might have caused the Post Office to report artificially high profits, potentially boosting executive bonuses.

Heather Self, consultant at Blick Rothenberg, a tax advisory firm, said that a case HMRC won against Scottish Power last year found that compensation payments made to consumers over mis-selling were non-deductible. “If I were in HMRC, I’d be arguing these payments [by the Post Office] are not deductible,” she added.

However, other tax experts said the matter was not clear-cut.

“A business can generally claim tax deductions for expenses incurred that are closely connected with its trade, even if this is a compensation payment,” said Tim Stovold, partner at Moore Kingston Smith, an accountancy firm.

“However, tax deductions cannot be claimed for breaking the law or for other fines that are punitive in nature . . . The question for the Post Office is where on the spectrum the payments sit.”

In its most recent annual accounts, published last month, the Post Office said it was in talks with HMRC “regarding potential taxation liabilities that could arise in relation to past events but for which no liability has currently been recognised”.

The accounts did not disclose the nature of the potential liability being discussed with HMRC. But they stated that the tax disclosures included assumptions “around the tax treatment of the provision expense and funding income related to the unique processes by which Post Office is seeking to make payments to claimants”.

The Post Office said the information on taxation was “appropriate and accurate” and it was in discussions with HMRC and the Department for Business and Trade, which oversees the state-owned company.

Nick Read, Post Office chief executive, raised concerns about HMRC’s approach last year with Victoria Atkins, the former Treasury financial secretary, according to government insiders.

The Post Office said it was seeking to ensure money it received to pay compensation would get the same tax treatment as its other government funding.  

A Downing Street spokesman told reporters on Thursday that the business department “has committed just over £1bn to ensure postmasters are compensated fairly”.

Auditor PwC also warned of a material uncertainty over the Post Office’s ability to continue as a going concern as government assurances to continue backing the organisation did not amount to a guarantee.

The accounts included an acknowledgment of financial risks, including “tax-related risks”, which if crystallised could result in the organisation being unable to meet its liabilities as they fall due — rendering it technically insolvent.

Treasury officials declined to comment on the Post Office case on the grounds of taxpayer confidentiality, but suggested that the government would fill any tax-related hole in the organisation’s accounts.

“The government is Post Office Limited’s sole shareholder and has always provided the necessary funding to meet its legal obligations,” said one official.

“Both the Department for Business and Trade, and Post Office Limited, will continue to receive the funding they need to make sure victims of the Horizon Scandal receive full compensation as quickly as possible and so services to the general public can continue.”

HMRC said it could not comment on specific taxpayers because of confidentiality laws. It added: “We collect the tax due under the law, creating a level playing field for everyone and funding public services.”

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FT

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