UK and International Tax news
Deduction Of Tax From P2P Interest Payments
Monday 15th February 2016
HMRC has recently issued Tax Brief 2 (2016) setting out its current position on the obligation to deduct income tax at source on interest that is paid on peer-to peer (P2P) loans.
Under existing tax rules in ITA 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.
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 FCA (including interim authorisation).
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.
Once the legislation has been amended HMRC will issue further guidance as appropriate.
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