INVESTORS who have been compensated after being missold endowments could be facing extra tax bills, warn accountants.

The Inland Revenue's view is that in many cases the compensation will be made up of a refund of the premiums plus an amount for the loss of use of the money.

This constitutes interest as far as the taxman is concerned and it is this "interest" element that is taxable, warns John Caithness, tax adviser at Grant Thornton, Poole.

But there is an argument that the whole payment is tax-free compensation - even though part of it may be calculated by reference to interest rates.

Individuals are expected to judge whether they have received "interest" and declare this on their tax returns.

"Even if it is accepted that there is tax to pay, it would have been easier if the Inland Revenue had come to an agreement with the insurance companies as to the tax treatment of any payments," said Mr Caithness.

"The individuals could have been advised when the insurance cheque was sent out as to whether they would need to make a tax return.

"This could have made things simpler and taken the onus off the individual to decide if he or she needs to make a return for tax purposes," Mr Caithness added.