The thorny issue of deducting income tax at source on interest earned through peer-to-peer investments has been addressed by an HMRC brief.
Existing tax rules dictate that income tax must be deducted from certain payments of yearly interest. In applying these rules to peer-to-peer lending investments, a number of issues arise. HMRC has clarified the core problem: “Whether tax must be deducted from a payment will depend on the identity of both the lender and the borrower of the loan.” The nature of the peer-to-peer lending model is such that identifying both ends of the lending relationship can be tricky for the individuals involved. Many of the platforms run investment pools of sorts, as opposed to allowing individual investors to allocate funds to specific loan opportunities. HMRC’s concern is that this complexity might lead to “inconsistent tax treatment”.
The government launched a consultation on the subject in the summer of 2015, and is currently in the process of changing the functionality of the obligation to deduct tax from interest paid on peer-to-peer loans. We expect legislation to be amended soon in order to clarify how tax obligations will apply in the future.
Prior to the updating of said legislation, interest payments made on peer-to-peer loans have been – and will in the short term continue to be – made without the deduction of tax at source. HMRC has intimated that the cost for platforms of developing the necessary infrastructure for deducting tax at source would be “disproportionate to the relatively small amount of tax which would be collected”. That means that, for the meantime at least, it is and will continue to be the responsibility of individual investors to notify HMRC on any income generated through peer-to-peer investments – and ultimately to pay the correct amount of tax due.
Elsewhere in the wonderful world of peer-to-peer taxation, bad debt relief for peer-to-peer investments is expected to come into force in April 2016, with individuals permitted to make a claim for relief on losses incurred form April 2015 onwards. This allowance by the tax man served as the primary impetus behind Zopa’s plan to reopen non-safeguard lending options in the not too distant future.
We’ll keep a sharp eye out for changes to the rules on income tax deduction at source.