HMRC issues interim peer-to-peer loans tax rules

HM Revenue & Customs (HMRC) has clarified the tax treatment of interest payments from peer-to-peer (P2P) loans by issuing interim rules on the subject.

The Treasury has decided that these payments will not be subject to income tax deductions at source until any amendments to legislation designed to address the matter are put in place.

Many-to-many

The lending model used by the P2P industry, described as “many-to-many” in the document, means that applying the existing tax rules in Chapter 3 of Part 15 of the Income Tax Act 2007 is difficult.

This section of taxation legislation regards the requirement to deduct income tax from any payments of yearly interest.

However, as with similar VAT issues surrounding the relatively new borrowing platforms, HMRC is attempting to solve inconsistencies in the way the process is handled in terms of tax liabilities.

One of the main problems concerning P2P loans is that the identities of both the lender and the borrower may be unknown to either party.

Changing obligations

The Government consulted on the issue of changing the obligation to deduct tax from interest paid on P2P loans over the summer of last year.

The new policy briefing says legislation will be amended and further information about how any obligations will apply in the future will be released as it becomes available.

One of the concerns is that the cost of developing the necessary systems to apply the current rules would be a burden on the P2P platforms and would also be disproportionate to the amount of tax collected, which is why the interim rules have been released.