pikestaff
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Post by pikestaff on Jan 12, 2017 8:46:00 GMT
ablrate , further to blender 's post and questions earlier in this thread, why is it that an SM Purchase lumps capital and accrued interest together in a single transaction entry, but an SM Sale splits capital and accrued interest into 2 separate transaction entries? As blender has observed, our dashboard "Total Interest Earned" figures are currently overstated, since any purchased accrued interest is not being deducted from interest paid. Unless this is corrected before tax statements are generated and figures reported to HMRC, any Ablrate lenders who have purchased SM loans with accrued interest will be paying too much income tax (and, without separate reporting of accrued interest on SM Purchases, it is very difficult to adjust for this manually) If you are a UK taxpaying individual, and assuming the loans in question are considered to be "simple debts" (I'm not on ablrate so I'm not sure), no adjustment should be made for accrued interest, because:
- interest is taxed on a cash basis therefore the seller escapes income tax on the accrued interest sold and the purchaser pays tax on the accrued interest when received.
- the premium on sale is capital and goes into the calculation of the seller and purchaser's capital gain or loss. If the seller is the original lender, the gain is outside the scope of CGT and not taxable or deductible. The purchaser will (if s/he does not resell) have a capital loss emerging as repayments are made. (On those platforms where "sales" are structured as repayments and new loans it is arguable that the purchaser should be treated as an original lender and so also be outside the scope of CGT, but this is debatable.)
[Edited because per p2pindependentforum.com/post/161743/thread Ablrate loans are securities to which the Accrued Income Scheme applies.] There are different rules for traders (everything is income) and companies (accrual accounting for all interest, taxed as income). I would expect all platforms to be reporting lenders' interest to HMRC on a cash basis. They are not AFAIK under any obligation to report SM premiums and discounts. [Edit: I think this is strictly true even if the Accrued Income Scheme applies, but it's conceivable that Ablrate might have cut a deal with HMRC to adjust the numbers they report.] Platforms should report the same interest figure to lenders as they report to HMRC.
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SteveT
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Post by SteveT on Jan 12, 2017 9:05:58 GMT
I would expect all platforms to be reporting lenders' interest to HMRC on a cash basis. Interesting. Do you happen to know for certain whether FC's tax statements treat accrued interest in the way you describe? (ie. only totalling cash interest paid, ignoring part-month accrued interest)
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blender
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Post by blender on Jan 12, 2017 9:07:55 GMT
Stevio - my understanding is that Ablrate have never suggested that instant returns are taxable as interest. It is not interest paid by the borrower to the lender, but an inducement from the platform to lend. It just looks like interest, but it's cash back aiui. Pikestaff. No adjustment should be made to what, please? Ablrate have not suggested that we should send total interest earned figure to HMRC for income tax, and will not say what figure they send on our behalf. If they gave us all the figure sent, they probably could not cope with the queries - even with the new ticketing system. The problem with 'total interest earned,' as far as I can see, is that when a sale is made the accrued interest sold is added to the seller's figure, and then when the next repayment is made it is added also to the buyer's figure. Double counted. Taxed twice? Please correct me if wrong - that would help. Fortunately it only matters for me for 2016-17 and I expect the team to sort it out in time.
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dawn
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Post by dawn on Jan 12, 2017 9:11:51 GMT
Stevio - my understanding is that Ablrate have never suggested that instant returns are taxable as interest. It is not interest paid by the borrower to the lender, but an inducement from the platform to lend. It just looks like interest, but it's cash back aiui.
That is what I understood as well.
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SteveT
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Post by SteveT on Jan 12, 2017 9:27:42 GMT
The problem with 'total interest earned,' as far as I can see, is that when a sale is made the accrued interest sold is added to the seller's figure, and then when the next repayment is made it is added also to the buyer's figure. Double counted. Taxed twice? Please correct me if wrong - that would help. Fortunately it only matters for me for 2016-17 and I expect the team to sort it out in time. Exactly. Currently it's neither one way nor the other.
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pikestaff
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Post by pikestaff on Jan 12, 2017 9:37:34 GMT
I would expect all platforms to be reporting lenders' interest to HMRC on a cash basis. Interesting. Do you happen to know for certain whether FC's tax statements treat accrued interest in the way you describe? (ie. only totalling cash interest paid, ignoring part-month accrued interest) I'm not on FC these days so I can't say, but it is what I would expect. Assuming your question relates to accrued interest on sales and purchases, my answer is somewhat complicated but please bear with me: The tax FAQ on FC used to say that because of the way their sales were structured all debts (including purchases) were "simple debts" and so outside the scope of CGT. It was the original source of this view. The FAQ was revised some time ago and now says "Any transfers by lenders who have acquired their loans on the secondary market may result in capital gains or losses. We recommend that you speak to your accountants or tax advisors for detailed advice on any such transfers."I don't know whether FC have (a) changed the way that they structure sales and purchases, (b) changed their view on the tax consequences, or (c) been advised to take no public view! If their sales and purchases are still structured so that in legal form each purchase is new loan, then: (i) If FC disregard the legal form for tax, the seller should be treated as receiving a capital premium, and the buyer should be treated as paying a capital premium, as per my earlier note. Both should be excluded from the return of interest to HMRC. (ii) If FC follow the legal form for tax, the seller actually receives the accrued interest in cash settled on the date of sale, and the buyer does not. The return of interest to HMRC should reflect this. (iii) If FC have no opinion on the matter, they may well default to (i) which is likely to be what HMRC is expecting. If purchases are no longer new loans, then (i) should apply in any event. All this describes what should happen, not what actually does happen. One thing I am aware of with FC is that the timing of reporting of capital losses (which is all I have left) has historically been way off what tax law requires (albeit somewhat closer to the new rules).
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stevio
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Post by stevio on Jan 12, 2017 10:08:03 GMT
Again, my question is not what it should be seen as, but exactly what ablrate are reporting it to HMRC as
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pikestaff
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Post by pikestaff on Jan 12, 2017 10:08:37 GMT
Stevio - my understanding is that Ablrate have never suggested that instant returns are taxable as interest. It is not interest paid by the borrower to the lender, but an inducement from the platform to lend. It just looks like interest, but it's cash back aiui. Pikestaff. No adjustment should be made to what, please? Ablrate have not suggested that we should send total interest earned figure to HMRC for income tax, and will not say what figure they send on our behalf. If they gave us all the figure sent, they probably could not cope with the queries - even with the new ticketing system. The problem with 'total interest earned,' as far as I can see, is that when a sale is made the accrued interest sold is added to the seller's figure, and then when the next repayment is made it is added also to the buyer's figure. Double counted. Taxed twice? Please correct me if wrong - that would help. Fortunately it only matters for me for 2016-17 and I expect the team to sort it out in time. "Instant returns" and accrued interest are two different things. I was responding to stevio 's comment on accrued interest and have amended my response to clarify this. I agree (based on what I've read on this thread) that "instant returns" are a purchase discount and thus capital in nature. Assuming that loans on Ablrate are "simple debts", as is the case for most p2p, then accrued interest should taxed as income only once, when received by the buyer, because all interest for individuals is taxed on a cash basis. The consideration paid for the interest is capital in nature and falls into the buyer and seller's capital gains calculations (if and to the extent that they are within the scope of CGT). Ablrate should be reporting the cash interest (and only the cash interest) to HMRC and that is also what lenders should be including in their tax returns.[Edited because per p2pindependentforum.com/post/161743/thread Ablrate loans are securities to which the Accrued Income Scheme applies.] Because If loans on Ablrate are were "securities" and not "simple debts", the accrued interest scheme has would have the effect of taxing the seller and relieving the buyer for the accrued interest www.gov.uk/government/uploads/system/uploads/attachment_data/file/323803/hs343.pdf. But this works in a roundabout way and the interest reported by the platform to HMRC should still, even in that case, be the cash interest. [Edit: Unless Ablrate have done a deal with HMRC so that they can report the adjusted numbers, which is not what the law requires but would make it easier for lenders.] If the loans were securities, you'd also need to worry about whether an "instant return" caused the security to be a deep discount security, in which case another set of rules would apply. Among other complications, the "instant return" would then be taxed as if it was income over the life of the loan. You don't want to go there! [Deleted because Ablrate say they make the payments even if the loan does not draw down. But I'd not be entirely comfortable on this point. Just to reiterate I am not on Ablrate so I don't know whether their loans are "simple debts" or "securities". I would assume the former unless told otherwise by the platform.
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oldgrumpy
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Post by oldgrumpy on Jan 12, 2017 10:20:56 GMT
I will be extremely annoyed with any platform which reports one figure to me and a different one to HMRC. The figures must be the same - or let the platform explain why not. So, ABL - if I find a different figure online in my tax statements to the one(s) you have quoted me following my request a month ago, already declared to HMRC, expect public fireworks. Have a nice day.
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james
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Post by james on Jan 12, 2017 12:25:23 GMT
If you are a UK taxpaying individual, and assuming the loans in question are considered to be "simple debts" Ablrate loans are not simple debts. Their professional advice is that they are securities covered by the Accrued Income Scheme. Under that scheme the buyer deducts the accrued interest they pay from their interest and the seller pays income tax on it as interest. The rest of your post is wrong because of this initial error. Ablrate has a detailed description of taxation on their platform that's already been linked to. All stevio is after is Ablrate being consistent in what they way and do and getting confirmation that at the moment they aren't, which is so.
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stevio
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Post by stevio on Jan 12, 2017 12:25:26 GMT
Stevio - my understanding is that Ablrate have never suggested that instant returns are taxable as interest. It is not interest paid by the borrower to the lender, but an inducement from the platform to lend. It just looks like interest, but it's cash back aiui.
That is what I understood as well. Looking into this further, Instant Returns should not be considered cashback, which is not normally taxable. But a capital gain (as @new2p2p posted) when the loan is sold or repaid. As such, is best seen as a discount to the capital price
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stevio
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Post by stevio on Jan 12, 2017 12:31:04 GMT
If you are a UK taxpaying individual, and assuming the loans in question are considered to be "simple debts" Ablrate loans are not simple debts. Their professional advice is that they are securities covered by the Accrued Interest Scheme. Under that scheme the buyer deducts the accrued interest they pay from their interest and the seller pays income tax on it as interest. The rest of your post is wrong because of this initial error. Ablrate has a detailed description of taxation on their platform that's already been linked to. My concern is are ablrate sending just the interest figure to HMRC or an adjusted figure to account for the accrued interest? Also, on the Tax Statements provided by ablrate, does it detail just the interest or the adjusted figure for accrued interest?
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james
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Post by james on Jan 12, 2017 12:31:10 GMT
The problem with 'total interest earned,' as far as I can see, is that when a sale is made the accrued interest sold is added to the seller's figure, and then when the next repayment is made it is added also to the buyer's figure. Double counted. Taxed twice? Please correct me if wrong - that would help. Fortunately it only matters for me for 2016-17 and I expect the team to sort it out in time. Exactly. Currently it's neither one way nor the other. Yes, that's my understanding of one of the corrections needed as well. The site isn't yet calculating using the full Accrued Income Scheme rules so at the moment we need to use our own calculations to meet our obligation to file a correct tax return, as distinct from breaking the law by filing a wrong one that is consistent with the current calculation used. Just telling HMRC that corrected numbers are expected later is fine and would avoid the law breaking risk.
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SteveT
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Post by SteveT on Jan 12, 2017 12:32:39 GMT
If you are a UK taxpaying individual, and assuming the loans in question are considered to be "simple debts" Ablrate loans are not simple debts. Their professional advice is that they are securities covered by the Accrued Interest Scheme. Under that scheme the buyer deducts the accrued interest they pay from their interest and the seller pays income tax on it as interest. The rest of your post is wrong because of this initial error. Ablrate has a detailed description of taxation on their platform that's already been linked to. Although whether that advice still stands after the recent changes to Ablrate loan contracts still requires confirmation AIUI
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james
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Post by james on Jan 12, 2017 12:40:50 GMT
SteveT, yes it does need that because they started to issue new contracts for secondary market deals, meaning that those now have more chance of being simple debts. As I understand it the position was that the original contracts weren't simple debts anyway so I expect their professional advice to be "no change, still AIS securities". Still needs that to be confirmed, though, which is why I asked them when they announced the change.
If it does turn out to be a change they could avoid the negative tax consequence - double taxation - by having the seller not sell the risk of the interest being paid but instead being paid when the borrower pays, pro-rated for ownership time. That way there's no double taxation but it's not as clean cut a transaction as the AIS way.
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