Deduction of tax from P2P interest: Consultation

I found this to be very interesting:

"10. Under the existing rules, which apply generally to interest other than that paid by banks or buil ding societies on deposits:
...
o 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."

I've not heard of any platforms following this rule. I wonder whether all that allow non-UK lenders are breaking it?

The other parts of 10 are interesting as well and I suspect that there may be a platform or two not getting them all right.

I posted a version of this on another thread but it really belongs here.

The current position re (lack of) tax deductions puzzles me greatly.

According to the consultation document, all of the platforms should already be deducting interest at source on payments by companies to individual lenders, or having their borrowers do so, even if the lenders are resident in the UK. See the first bullet below (full text of para 10 of the con doc):

10. Under the existing rules, which apply generally to interest other than that paid by banks or building societies on deposits:

• 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.
  

None of the platforms that I'm involved with is deducting interest. There was a brief flurry of excitement when one borrower on AC decided to deduct at source and AC agreed that they were right to do so, but this was resolved following a meeting with HMRC where it was agreed that deductions would not be made. We do not know what happened at the meeting or the basis of the decision.

I assumed at the time that it was a concession pending the consultation, and had expected the consultation paper to be drafted along the lines of "we have been allowing this by concession because of the acknowledged practical issues but now we are consulting on the way forward". But it isn't. It assumes the platforms are currently deducting interest at source, which they are not. I'm baffled...

arbster - Sadly not. The current legislation referred to has been in force (in one form or another) for many years. If you want to read through the HMRC manual it is here: www.hmrc.gov.uk/Manuals/saimmanual/saim9000.htm. It is not an easy read but I ploughed through it some time ago and came to the conclusion that it says what para 10 of the con doc says. The key page is this one: www.hmrc.gov.uk/Manuals/saimmanual/saim9070.htm

I believe that it is worth our while responding to this consultation,
www.gov.uk/government/consultations/deduction-of-income-tax-from-interest-peer-to-peer-lending

and also to the wider consultation - Deduction of income tax from savings income: implementation of the Personal Savings Allowance
www.gov.uk/government/consultations/deduction-of-income-tax-from-savings-income-implementation-of-the-personal-savings-allowance

I responded to the P2P Isa consultation. It was noticeable how few retail customers had responded. Little surprise then that the results were skewed towards the providers.

HMRC are aware that the deduction at source legislation was not designed with P2P in mind and have been telling platforms/P2P borrowers not to deduct tax from interest until specific legislation is in place.

When creating the legislation to commence in 2017, surely the same logic applies to P2P interest as to bank and building society interest: the significant majority will have interest within the tax free Personal Savings Allowance or ISA's. There is no point deducting tax and then the majority claiming it back from HMRC.

In addition, for those banks currently responsible for deducting the tax and paying it across to HMRC the removal of requirement to deduct tax on interest payments represents an important administrative simplification.

IMHO, abolishing the tax deduction scheme for banks and building societies but imposing it on P2P platforms give banks and building societies an unfair competitive advantage.