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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) loans.

Readership

Anyone making payments, or acting as an intermediary for payments, in whatever form, on P2P loans including:

  • P2P lending platforms
  • anyone who lends money using P2P platforms
  • anyone who borrows money using P2P platforms
  • anyone who acts as an intermediary for payments made on P2P loans

P2P loans

The P2P 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.

P2P 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.

Background

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).

Issue

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.

Current position

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 available.

Interim treatment

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 platform
  • 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.

Future implications

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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Article Published/Sorted/Amended on Scopulus 2016-01-12 16:06:19 in Tax Articles

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