P2P interest: HMRC relax tax deduction requirements ready for 2017 changes

Mon 18 Jan 2016

Following the Autumn Statement 2014 the government has consulted on new rules for the deduction of tax at source on payments of annual interest made on peer to peer (P2P) loans from April 2017. The consultation opened on 15 July and concluded on 18 September 2015. The result of the consultation has not yet been released but in the meantime HMRC have issued HMRC Brief 2 (2016) which sets out when HMRC require tax to be deducted from interest on P2P loans and when they will not.

P2P loans are mainly provided through “platforms”, intermediaries who supply borrowers with loans that the platform sources from the lenders but the present income tax deduction at source rules are based on the status of the borrower, with whom the lender may have no direct contact.

The present rules

In the consultation document HMRC set out their view of the present rules whose application they regard as inconsistent in the way they affect those who receive P2P interest.

·         Where the borrower is a company who pays interest due to an individual, the borrower (or an intermediary such as the P2P platform) is required to deduct income tax at source from the interest for payment to HMRC, and pay the interest to the lender net of tax.

·         Where the borrower is a company who pays interest due to another UK company, neither the borrower nor the P2P platform is required to deduct tax at source, and interest may be paid gross.

·         Where the borrower is an individual (including a sole trader) who pays interest to either an individual or a company resident in the UK, neither the borrower nor the P2P platform is required to tax deduct at source and interest may be paid gross.

·         However where the interest is due to a lender who is resident outside the UK, the borrower (or the P2P platform) is required to deduct income tax at source from the interest for payment to HMRC, and to pay the interest to the lender net of tax, regardless of the identity of the borrower.

As a result P2P lenders may receive interest of which part has had income tax deducted at source and part not, unnecessarily complicating the process of completing their tax returns.

The changes proposed

The legislative changes that the Government intends to include in Finance Bill 2016 would:

·         remove the obligation to deduct tax on interest from the borrower and place it on the platform;

·         remove the need to consider the status of the borrower; and

·         determine whether interest was deductible on the basis of the status of the lender.

The attraction to the Government is that this should make for easier monitoring of tax deductions as platforms are regulated under the Financial Services and Markets Act 2000.

If the condoc proposals are implemented tax will only be deductible on interest paid to:

·         individuals; and

·         non-UK resident persons.

Once the legislation has been amended HMRC have said they will issue further guidance, as appropriate.

The interim solution

Until the new legislation HMRC accepts that platforms will not be required to deduct income tax on interest paid by any:

·         UK borrower to a UK P2P platform;

·         UK P2P platform to any lender;

·         UK P2P platform to any intermediary; or

·         intermediary to a UK P2P platform.

This only applies where the loan is made through a UK P2P platform authorised by the Financial Conduct Authority.

Any other annual interest, regardless of it being P2P, is subject to the normal, continuing interest deduction rules set out above.

Consultation may lead to further changes

The condoc also raised the possibility that the obligation to deduct income tax on interest may be abolished altogether, including from P2P. As from 6 April 2016 banks and building societies will no longer be obliged to deduct income tax from interest on their deposits: this change is made together with the introduction of the savings allowance, also effective from 6 April 2016. The savings allowance will exempt savings income of basic rate taxpayers up to £1,000 and higher rate taxpayers up to £500 but not additional rate payers.

Therefore the Government is considering whether it will be appropriate to maintain deduction from P2P interest at all.