An update from HM Revenue & Customs has detailed the investor, not the peer-to-peer lending platform, will have to pay the tax bill and notify the government about interest paid.
A brief, published on Friday (8 January), set out HMRC’s current position on the obligation to deduct income tax at source on interest that is paid on P2P loans.
Under existing tax rules there is a requirement to deduct 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 depends on the identity of both the lender and the borrower.
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, according to HMRC.
The government is in the process of changing the obligation to deduct tax from interest paid on P2P loans, with a consultation undertaken last summer to amend legislation and clarify how any obligations will apply in the future.
For now, HMRC stated it has decided the interim treatment is that costs to 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,” stated the HMRC policy paper.
This applies to interest payments made by a UK borrower to a UK P2P platform, a UK P2P platform and any intermediary to or from a UK P2P platform.
For the lender, this means the interest it receives from P2P loans is taxable in the same way as any other payment of interest, so 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.
As FTAdviser’s Guide to Peer to Peer explained in October, until 6 April 2016, investors are being taxed on interest earned at their own income tax rates.
Most platforms provide annual statements to make declaring the interest easy, with some basic-rate taxpayers, who otherwise do not complete tax returns, simply posting these annual statements with a cover letter to HMRC.