Changes are afoot in the UK tax regime for participants in loans made via peer-to-peer (“P2P”) platforms. The government has recognised that existing tax rules are not fit for purpose when it comes to the new business model of lending P2P and so is consulting on standardising the rules regarding the deduction of income tax from interest paid on loans made through P2P lending platforms (the “P2P Consultation”).

 

 

 

 

 

How are the current rules applied?

 

Current legislation requires certain payment of interest to be paid subject to deduction of tax at source. The person paying the interest should deduct tax at the basic rate of income tax (20%) and pay it over to HMRC. The rules are complex to apply and depend on (i) the term of the loan (there is only a requirement to deduct tax at source for any payment if the interest is ‘yearly interest’, i.e. where the parties intend that the loan should last for at least 12 months), (ii) the identity of the borrower, (iii) the identity of the lender and (iv) the location of the lender. In summary:

 

	UK individual lender	UK corporate lender	Overseas lender
Individual borrower (including sole traders)	Neither borrower nor P2P platform is required to deduct tax at source. Interest may be paid gross.	Neither borrower nor P2P platform is required to deduct tax at source. Interest may be paid gross.	Either borrower or P2P platform is required to deduct income tax at source from interest for payment to HMRC. Interest is paid to lender net of tax (although some overseas lenders can rely on a double tax treaty for interest to be paid gross).
Corporate borrower	Either borrower or P2P platform is required to deduct income tax at source from interest for payment to HMRC. Interest is paid to lender net of tax.	Neither borrower nor P2P platform is required to deduct tax at source. Interest may be paid gross.	Either borrower or P2P platform is required to deduct income tax at source from interest for payment to HMRC. Interest is paid to lender net of tax (although some overseas lenders can rely on a double tax treaty for interest to be paid gross).

 

 

What are the current problems?

 

1. For borrowers: As a loan provided via a P2P platform is often made up of smaller amounts lent by multiple lenders (who may be UK individual, UK corporate or overseas lenders), it is possible that a single interest payment in respect of a P2P loan may be made up of some interest on which tax should be deducted and some interest where tax should not be deducted. In addition, in many cases the borrower will not know the identity of the lenders as this is often confidential information held by the platform. This makes it very complicated for a borrower to work out what their obligations are and how to comply with them.

 

2. For lenders: A lender may receive interest from multiple borrowers, some of whom will have deducted tax from those interest payments and some of whom will not. It can be complex for the lender to work out how much of their income has already been taxed, and how much income they have received gross.

 

 

What is the government proposing?

 

The government is currently consulting on the following proposals:

 

1. Borrowers should treat all of the interest they pay on a P2P loan in the same way, even when that loan is funded by investment from multiple lenders;

 

2. Lenders should receive all of the interest that they receive from their P2P portfolio in the same way (i.e. either all gross or all net);

 

3. Any deduction of tax should be made by the P2P platforms (or possibly another intermediary) and not by the borrower;

 

4. Whether the interest on a P2P loan is subject to deduction of tax should depend only on the status of the lender (and not the identity of the borrower or the duration of the loan); and

 

5. Whether the return and payment of tax deducted on P2P interest should be (i) allowed to be made on an annual basis rather than a quarterly basis to make it easier to deduct the correct amount of tax or (ii) subject to the same quarterly return and payment requirements of those responsible for deduction of tax from other forms of interest.

 

 

How might this affect me?

 

If the government’s proposals are implemented, they could result in the following changes:

 

1. Platforms: The onus for deducting tax could fall solely on the platform. The platform would be responsible for identifying the status of the lender and deducting tax on all interest payments that are paid to relevant lenders.

 

The government is currently in the process of considering how the taxable income that individuals receive from their P2P portfolios should be calculated. One proposal is that interest should be calculated at portfolio level, after ‘bad debts’ or loan parts that become irrecoverable over the year have been deducted. Because of the additional calculations that may be needed to identify the taxable amount of P2P interest received, the government is considering whether it may be appropriate to allow P2P platforms to return and pay the tax deducted on P2P interest to HMRC on an annual rather than a quarterly basis. This may have added cash flow benefits for platforms.

 

2. Lenders: Lenders could receive all of their interest in the same way which should simplify the reporting obligations for those lending through P2P platforms. It should also be noted interest received on P2P loans is treated as savings income and at the March 2015 Budget the government announced that a new Personal Savings Allowance (“PSA”) will apply from 6 April 2016 to remove tax on up to £1,000 of the total savings income for basic rate tax payers and up to £500 for higher rate taxpayers. Any changes arising from the P2P Consultation should therefore be considered in conjunction with the PSA announcement. As a result of the proposed changes, it is possible that some lenders will no longer be taxed, or will not have to fill in a self-assessment form, purely because of P2P income.

 

3. Borrowers: The obligation would no longer be on the borrower to deduct tax on any interest owing in respect of a P2P loan. This would bring the borrower’s obligations in relation to P2P lending in line with the obligations imposed on them when obtaining loans from traditional finance providers.

 

 

How does this sit with the government’s parallel consultation on the deduction of income tax from interest and other types of savings income?

 

At the March 2015 budget, the government announced that from 6 April 2016 banks and building societies will no longer deduct tax from payments of interest to their depositors. The government has launched a parallel (and broader) consultation to the P2P Consultation on whether changes are required to the rules on the deduction of tax at source currently in place for savings income (other than interest paid by banks and building societies), including interest under P2P arrangements (the “Wider Consultation”).

 

As stated in the P2P Consultation, “if a decision were made to abolish, wholly or partly, the deduction of tax at source regime more generally then the issues currently being faced by the P2P sector fall away or become less pressing. However, it is possible that deduction of tax obligations will continue to apply, including to interest payments on P2P loans”. The outcome of the Wider Consultation will therefore need to be taken into account before finalising the specific rules for the P2P sector.

 

One might question why the P2P Consultation has not been delayed if the Wider Consultation is considering the antecedent question of whether there should be a more fundamental change to the UK’s rules on the deduction of tax at source. A pessimist might say the P2P Consultation just shows that the government is not seriously contemplating that deduction of tax at source would be removed altogether from the P2P sector.

 

 

Conclusion

Considered in the round, the proposed changes in the P2P Consultation are positive and would put P2P lending on par with traditional finance options, helping P2P lending become a more mainstream choice for consumers.

 

Both the P2P Consultation and the Wider Consultation are open until 18 September 2015 and the government welcomes responses from P2P platforms, lenders of P2P loans, borrowers of P2P loans, representative bodies, financial institutions and tax professionals. Further details can be found at:

 

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• P2P Consultation: ; and
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• Wider Consultation: .
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Jonathan Segal, Partner at Fox Williams LLP

 

Jonathan is a partner in the FinTech and Alternative Finance team at Fox Williams, a City-based Law Firm. He advises clients across the FinTech and Alternative Finance spectrum, from start-ups disrupting existing markets with innovative technology to financial institutions looking to invest in new technology.

 

He has particular expertise in peer-to-peer and crowdfunding platforms, drawing on his extensive experience in the banking and finance sector gained both in-house at major financial institutions and in private practice. His experience spans a variety of financial products, including loans (both corporate and consumer), real estate and development finance, asset-based lending, receivables financing, asset finance, trade finance, capital markets, derivatives and repos. A regular speaker at industry events both at home and abroad, Jonathan is also heavily involved in next generation disruptive financial products such as virtual currencies (including Bitcoin), blockchain technology and the use of Big Data in financial predictive analytics and disruptive insurance models.

 

Fox Williams LLP are experts at advising entrepreneurs and FinTech businesses. For more information as to how Fox Williams can help you (including arranging a free consultation) or for further information on the issues discussed in this article, please liaise with either  or .