Funding Secure P2P Tax Question/Thoughts

iRobot you have expanded better than me.

I don't have an answer to all of the legal technicalities that you raise and I do agree that the cost of the legal opinion will likely be costly and beyond the likely savings for me or anyone.

To elaborate:

1)

A P2P loan according to HMRC website

"Peer to peer lending operates on a ‘many to many’ lending model through internet intermediaries, also called a lending platform, who arrange and manage the loans.

How peer to peer lending works

Lenders place their money with a peer to peer platform which is then lent to lots of different borrowers as many small loans. Each borrower borrows small amounts from many different lenders to make up the full loan they need. The platform will collect the repayments of interest and capital from each borrower and pass them to the lenders. The platforms are regulated and authorised by the Financial Conduct Authority (FCA)*, they put lenders with money in touch with borrowers."

However by paying out to JC Starr we apparently did not lend to the borrower, we lent to an intermediary and hence broke the chain of lending outside of our p2p agreement. And P2P is a special case outside the norm and therefore by default we are not lending P2P we must be lending in a normal loan and a normal load would be subject to normal capital gains and losses.

* if the FCA needed to regulate the platform, did JC Starr by being in the middle become an unregulated platform?

2)

If the client account has been compromised by the JC Starr Claim, it seems to me that all the monies paid in and out of that account have been compromised. This has been demonstrated by the lack of repayment in a timely manner and the court putting in place a representative and a potential claim for fees from all lenders, irrespective of when they lend the money (e.g. beforehand).

3)

In addition a payment to a third party (JC Starr, etc) would demonstrate a contract has been formed. However, their is nothing to say that this is a P2P contract, in fact by default it would probably not be a p2p contract (my thoughts) and hence normal capital gains and losses would apply as this.

Finally

However, I might just present the loan as a loan in my tax return unexplained**. After all according to the last load of adverts I saw (many years ago) 'Tax should not be taxing' and I am a believer that an ordinary person should be able to fill in anything, taxes, planning permission, etc. without expert help otherwise why do we have a government. The FCA and others have proved to be self serving so why shouldn't I

**So I will probably roll the dice, as you said keep it simple. As to sleeping well at night, i don't but its the public waste that I see that really annoys me and keeps me awake, I see millions burnt.

As I said I have no legal training, I am an engineer.

I do agree that life is short and overthinking things can be a waste of valuable resource but would temper that with 'look before you leap' and at least understand the probability of being on the right side of any HMRC decision and, perhaps more importantly, understand the impact of being on the wrong side.

Or - put another way - attempt to fully answer 'what's the worst that can happen'.

Maybe I'm being overly cautious and, if so, that is almost certainly as a result of being under the HMRC's lens some twenty years ago when my PSC limited company was investigated under IR35 rules. My accountant and I were reasonably confident the company was operating wholly outside of IR35 but there was no guarantee that the HMRC inspectors would see it the same way.  Had the decision gone against me, I would have been regarded as owing around £100k plus any interest that was deemed applicable.

That's the sort of thing that cause me sleepless nights and I've since taken steps to, as far as possible ensure, it wouldn't happen again.

No doubt the sums involved will have a bearing; eg: large enough to be worth taking on any risk of incurring the scrutiny of HMRC, yet affordable enough not to be too much of an encumbrance if HMRC comes knocking on the door wanting £X + y% interest from years gone by.

Somewhat off-topic, perhaps, but I wonder to what degree so-called AI is being used by HMRC. (Or maybe the US' IRS service given, I think, a far higher percentage of US citizens complete their own returns?) Taking a massive volume of inputs such as found in the tax return process, calculating the norms and scanning for parameter-based anomalies would seem an ideal use case. I should have thought it theoretically possible to devise a highly automated process that accurately identifies challengeable returns and progresses that challenge through to determination without, in the majority of cases, input from a human on the agency-side.

But I digress. Weigh up the pros and cons and decide but - a bit like any investment decision - do be very aware of the potential down side.

I think you might be overthinking this.

The loans on FS are peer to peer agreements under article 36H. I dont think the payment to JC * has any impact on the loan contracts at all. We havent lent any money to JC *, any liability arises through an entirely separate route due to client money rules and pooling events. Specifically through a court order, not any form of contract, lending etc. It seems to me it is just a recovery cost, like the administrators fees. The position may be clearer once the Court has determined where the funds ultimately are derived from.

P2P gains and losses are taxable under income tax rules, with CGT only coming into pay if there are insufficient gains to cover losses under IT. You can declare a loss at the point a loan enters formal insolvency (not the platform) with any subsequent recoveries then counting as income or at the point the platform declares the loss. (In the case of FS these are actually the same as it declares losses on the basis of loans entering insolvency) The loss is the difference between capital lent and recovered capital distributed so aby costs, fees fall before the loss is calculated. Put simply if yo invest £100 and after deductions, whatever they are, you get £50 back then the claimable loss is £50. 

The wider question would seem to be how a loss due to a client account deficiency is treated as that is outside the P2P regime ... should that circumstance arise then might need specialist advice.  We know the client account was compromised by FS outside of the JC * case. Dont know if any of the Collateral lenders have looked at it as the circumstances already exist there. (though fraud is an additional potential factor there)