HM Revenue and Customs Brief 2/16 - deduction of Income Tax at source from payments of peer-to-peer
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Please note that 1/16 has not been released to the public
Published 8 January 2016
Purpose of this brief
This brief sets out HM Revenue & Customs’ (HMRC’s) current
position on the obligation to deduct Income Tax at source on interest
that is paid on peer-to-peer (P2P)
Anyone making payments, or acting as an intermediary for
payments, in whatever form, on P2P
- anyone who lends money using P2P
- anyone who borrows money using P2P platforms
- anyone who acts as an intermediary for payments made on P2P loans
lending sector enables individuals and businesses to lend to each other
through the intermediary of an internet platform. It provides new
opportunities for investors and new sources of finance for borrowers.
lending operates on a ‘many to many’ lending model where the platform
acts as an intermediary to arrange and manage the loans. The platforms
put lenders with money in touch with borrowers. The idea is that both
the lender and borrower benefit from better rates than they could get
from a bank.
A borrower will borrow small amounts from many lenders to make
up the full the loan that they need, and lenders will place money with
the platform that is then lent out to many different borrowers in many
small sub loans.
Under existing tax rules in Chapter 3 of Part 15 of the Income
Tax Act 2007 there is a requirement to deduct Income Tax from certain
payments of yearly interest (broadly, interest on a debt of more than
12 months duration).
Whether tax must be deducted from a payment will depend on the
identity of both the lender and the borrower of the loan. The
many-to-many lending model used by the P2P
industry means that the application of these rules is very complex for
loans made through P2P
platforms and leads to inconsistent tax treatment.
The government is in the process of changing the obligation to
deduct tax from interest paid on P2P
loans. A consultation took place over the summer of 2015 and the
legislation will be amended to clarify how any obligations will apply
in the future. Further information about this will be released as it is
The costs to the platforms of developing the necessary systems
to apply the current rules in the meantime would be disproportionate to
the relatively small amount of tax which would be collected.
Consequently, in the period before the government makes any necessary
changes to the legislation, interest payments made on P2P loans may be made
without deduction of tax.
This will apply to interest payments made by:
- a UK borrower to a UK P2P
- a UK P2P
platform whoever made to
- any intermediary to or from a UK P2P platform
In each case the P2P
platform must be authorised by the Financial Conduct Authority
(including interim authorisation).
What this means
for the lender
The interest that a UK lender receives from P2P loans is taxable in
the same way as any other payment of interest. This means that if a
person receives interest without deduction of tax, it is their
responsibility to notify HMRC
of the income and to pay the correct amount of tax due.
The tax treatments outlined in this brief are for the purpose
of deduction of tax under Chapter 3 of Part 15 of the Income Tax Act
2007 only. They do not affect the treatment of either the loan or the
interest for regulatory, taxation (other than the deduction of tax at
source) or other purposes.
Once the legislation has been amended HMRC will issue
further guidance as appropriate.
About the Author
© Crown Copyright 2015.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
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