UK investors - P2P Bad Debt Relief

A key item to notice is that once you or a platform have considered that a loan is irrecoverable you can sell at any price you can get.

This means there's a trade off. Sell early when pessimistic but not at the decision point for irrecoverable and you're likely to get a higher price. But you lose the tax relief. Wait and you'll get the tax relief but have much less chance of an optimistic buyer.

This also means that the decision over whether to sell or wait depends on tax rate. Higher rate tax payers gain more by waiting than lower rate tax payers because the higher rate tax payers get more relief from HMRC, in effect 40% or maybe 45% recovery from HMRC. But a person paying no income tax isn't going to get any relief from HRMC anyway so they might as well dump it early without waiting for it to become treatable as irrecoverable first.

Unfortunately Bondora:

1. has stopped telling us when legal action is taken.
2. has stopped telling us  when a borrower becomes insolvent, form bankruptcy or whatever else.
3. never did tell us if an arrangement to pay that would write off some of the capital was made and how much capital was written off.

Each of those things is a potential trigger for a loan becoming treatable as irrecoverable.

What this means is that we don't have a lot of choice but to use crude measures like time since last payment in our decision rules for when we think it's reasonable to consider a loan should be treated as irrecoverable.

Bondora has changed its approaches to debt collection over the years so it's not unreasonable to use different rules for different periods that reflect those changes.

For example, for Estonian loans until last summer Bondora commenced legal action quite early and if there has been no recovery by a year after the last payment there's not likely to be any recovery because that's long enough for the Estonian legal system to have delivered a result and for perhaps six moths of post-decision further collection work potentially including seizure from pay or property to take place. Since we were also told when the decision was given we can use that and some time after it as a decision point for older loans. Perhaps a year after decision to conclude nothing is going to be delivered if you want to wait that long. Or a year after last payment, Pick whatever makes sense to you.

For the situation since last Summer and on to now, Bondora switched to three DCAs with three months each and no assurance of any legal action even after that. And with the recent changes, no information even if legal action is commenced or not. Here it's useful to know what the contracts say and if you look at those you'll find that there's a time threshold after which a loan is assigned to Bondora for recovery. And assignment is again one of HMRC's possible triggers. While we don't know enough about the timings to get things perfect, we might conclude that in the current situation it makes sense to wait say three or six months after status has changed from Collection to Recovery to conclude that it's reasonable to treat it as irrecoverable.

Here we aren't making arbitrary changes but are instead responding to changes in how debt collection is being carried out by the platform and adjusting our practices to cope with those changes.

I haven't decided what I'm doing yet but for the Estonian only loans that I have I might for older loans use something between 6 and 18 months after last payment and for the newer current debt collection practices use six months plus being in Recovery state, since I know that's long enough for the assignment trigger to have been reached and at least two DCAs will have failed to make any recovery by then. And regardless of those if I noted that a borrower had gone bankrupt or that a loan was identity or other fraud, these are clear triggers, shame we don't get to see them any more so I have to rely on my past notes for these.

Because of the debt collection changes in 2015 there will be some overlap of rules that could result in higher claims in 2015 than going forward as we use rules based on more information in the past and less information now.

Just adding another thought, since HMRC will insist claims in £* at what stage should the conversion be made?

Date that the loan officially defaulted?
Date that you deem the loan irrecoverable?

In my years investing with isePankur/Bondora I have seen +- fluctuations of over 16% in the exchange rate (currently sitting at a level not seen since Nov 2014) so when the loan is actually 'valued' will have a big impact.

*As per HMRC instructions to me I perform the calculation on a daily basis so have all the back exchange rates in a spreadsheet.

Well this exercise has sent me round and round in circles!

The only way I seem to be able to get a set of loans together that remain consistent is to take

1. Loans that were at stage 2 at the close of 05/04/2016

2. For loans that made payments to add 1 calendar year to the date of last payment and to treat this date as the date on which the loan is deemed irrecoverable.

3 For loans that didn't make any payments to add 1 calendar year to the date of default and to treat this date as the date on which the loan is deemed irrecoverable.


Claim for any loans that have an 'irrecoverable' date within the tax year.  Claim for loans at Stage 3 whose dates again fall into the tax year.

Slightly concerned that this approach is too simplistic but in reality I cannot put together another approach that doesn't immediately show up anomalies.
Worked out this way my 'claim' represents 16.41% of income in the tax year.
  

I noted the days and loans overdue on 5/6 April and decided which I believed were irrecoverable based on the HMRC guidance as I think it applies when the platform doesn't decide what is irrecoverable without legal action (it's different from written off). That doesn't map perfectly to Bondora's processes but I just allowed ample time since last payment and the various ranges I described earlier so I would't end up deeming too much irrecoverable that may eventually pay.

I was helped a bit in that effort because I already keep my own records of defaults but the information was there online at the time and that's what I used for a first approximation. So many other approximations needed this year that that was a reasonable one for the first cut at my estimated tax return.

If you agree with the general approach I've described you could consider downloading the payment history for all of your loans and working out which were in default at the end of the tax year then which of them you consider to be irrecoverable without legal action.

That is not what HMRC has said in its guidance and I assume that complies with the law. The HMRC guidance is, my bold:

"2) The loan must be made through a regulated peer to peer platform.

The loan must be made through an operator who has permission under Part 4A of the
Financial Services and Markets Act 2000 to operate an electronic system in relation to
the lending of money.

This condition may also be met if the loan is made through an operator who is based
elsewhere in the European Economic Area and has been granted equivalent permissions
under the law of that jurisdiction.

However this will only be the case where the operator has been granted a permission to
undertake the activity, if the law instead states that permission is not needed to operate
as a peer to peer lending platform in that jurisdiction then the condition will not be met"

So perhaps Bondora will tell us:

1. the date on which Bondora withdrew its application for full permission from the fCA.
2. the date on which Bondora relinquished its interim permission from the fCA, if it has done that. if not, when it plans to.
3. whether Bondora is currently regulated by any other regulator that that in Estonia, where I assume it is still based, must grant permission to operate as a P2P platform so that we can use that permission.

I assume that we can deduct for loans that become irrecoverable until the later of dates 1 or 2. And if Estonian firms need permission to operate as a P2P platform we can presumably still make the deduction for the time period for which Bondora has that permission.

All red stage 3 seem to be defined under the Collection process as 'write offs' or 'Bankruptcy' so hopefully this will be sufficient grounds to claim relief.

The other red loans appear to be still with the bailiffs, legal proceedings or in some stage of recovery.  I see some of you are treating some of the 12 month default stage 1 and 2 as non-recoverable as well.  Is that what you have filed for the last tax year?