Victims of the Post Office’s (PO) Horizon IT scandal have had the majority of their compensation payouts ripped away due to “unjust” tax deductions.

More than 700 branch managers were given criminal convictions between 2000 and 2014 when a glitch in the PO’s computer system, Horizon, made it look as though money was missing from their accounts.

The scandal has been described as the most widespread miscarriage of justice in UK history. Although PO has begun issuing compensation through its Historical Shortfall Scheme, designed to repay those who lost out, some postmasters have missed out on hundreds of thousands of pounds due to tax deductions on their payouts.

Last month, the Daily Mail revealed one in particular, Francis Duff, was told he owed £71,533 in income tax on his compensation, and £251,359 will be taken under bankruptcy proceedings, leaving him with just £8,000.

Tax lawyer Dan Neidle has slammed the government for its wrongdoings, describing them as “scandalous”. He told Better Retailing: “The first problem is that the compensation payouts, which are for loss of earnings, are taxable in the same way as normal earnings. Unlike normal earnings, multiple years are being taxed at the same time, pushing the victim into a high tax bracket.

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“The second problem is that the compensation is covering events from many years ago, so a large amount of the payment is interest. This is fully taxable, and 20% of the tax will be withheld by the PO. The remainder of that will be payable by the victims on their self-assessment return. They aren’t being warned about this and hence why this news has been uncovered.”

Neidle went on to stress that a lot of victims won’t obtain tax advice, and therefore won’t declare the interest on their tax return, so could fall into default with HMRC. “These people have already gone through hell and back and they are now being asked to pay an accountant to stop them being taxed thousands of pounds,” he said.

As a result, Neidle is calling for a blanket tax exemption for all postmasters. “What makes this worse is that this has happened at the hands of a company owned by the government again,” he said. “The government has a special duty here, even if some people have been taxed already, this should be undone.”

In the last week, the Business Department has promised to consider the individual circumstances of those affected postmasters, and “make offers accordingly”. A spokesperson for the PO told Better Retailing: “PO and our shareholder, the Department for Business and Trade, are working to ensure all victims of the Horizon IT scandal are returned to the financial position they should have been in had the wrongs not occurred.

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“We want to see fair compensation for all victims and, together with the government, are looking at issues raised so that if any unfairness is found in individual cases, this can be addressed.

“We are acutely aware that, in some cases, shortfalls caused severe impacts on postmasters’ lives. The Historical Shortfall Scheme provides for the human costs, such as personal injury, distress and inconvenience, harassment, loss of reputation and bankruptcy costs if these are directly related to shortfalls.”

Better Retailing also understands that if a postmaster does not accept an offer, it is possible for it to be revised and the scheme provides for reasonable legal or accountancy advice.

When asked what affected postmasters should do, Neidle advised: “I know that it’s unusual advice from a tax lawyer, but I don’t think they should do anything. I have faith that the government is going to see there is only one answer here, and do the right thing. The government have a responsibility for everything that has gone wrong in the past.”

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