Peer-to-peer bad debt relief: proposed technical criteria

Are we talking about lenders' involvement in a given loan, or a given platform, or their entire P2P/P2B investment?

Does this add an extra level of urgency to savingstream's intention to reorganise themselves with a trust?  Or is the trust irrelevant to this, such that this would require an even greater reorganisation for SS/Lendy?

We should also consider that several of the big peer-to-peer companies in the UK are not regarded as "peer-to-peer" as far as the FCA is concerned and don't have "peer-to-peer lending" permission.  I doubt lenders would be able to offset bad debts if the company does not operate within the P2P regulatory structure.

I agree with your last sentence, but this contradicts what was said in the Budget Red Book, and in HMRC's Overview of Tax Legislation and Rates, both of which say the relief will be limited to loans made after the given date. I'd not count any chickens yet!

I think HMRC are worried about a flood of claims for tax relief on those tenners you lent to your mate that never were repaid.  And your mate's claim for relief for the tenners they lent to you that you didn't repay.

I've never planned any defaults, but sometimes they just appear from nowhere.

Very minor update in the summer budget yesterday:

2.74 Bad debt relief for peer to peer (P2P) industry – As announced at Autumn Statement
2014, the government will allow tax relief on bad debts incurred on P2P loans against other
P2P income from April 2015. A technical note was published at March Budget 2015. Draft
legislation will be published later this year. (Finance Bill 2016)

So:
(1) we still have to wait for the draft legislation
(2) the final legislation is due to be brought forward in the Finance Bill 2016, ie following the March 2016 budget.

This means we won't know the final rules until the end of the tax year, but we should have them in time to do our tax returns!

I somehow missed the draft legislation, which was published on 9 December together with draft HMRC guidance.  See here: www.gov.uk/government/publications/bad-debt-relief-for-peer-to-peer-investments.

It is now clear that the relief will be given for losses arising on or after 6 April 2015, without regard to when the loan was made.  Relief will be given when a loan becomes irrecoverable; I will come back to this.

You will only be able to claim the relief against p2p interest income.  Relief for losses arising on or after 6 April 2016, against interest income on the same platform, will be given automatically.  Relief for losses arising between 6 April 2015 and 5 April 2016, or against interest income on another platform, will have to be claimed.

The draft legislation is silent on when a loan becomes irrecoverable.  The draft HMRC guidance states:

"When does a P2P loan become irrecoverable?

A loan may be accepted as having become irrecoverable when there is no reasonable prospect of
the recovery of the loan. When assessing recoverability, the funds available and potentially
available to the borrower must be considered. A claim therefore cannot be established simply
because the borrower has insufficient liquidity on the date the loan had been called in.

Whether a loan has become irrecoverable should be judged on a case by case basis, however the
following common examples are relevant:

• When the borrower has entered formal recovery procedures such as liquidation,
  administration, receivership or bankruptcy the debt would normally be considered
  irrecoverable.
• If the debt is released by the lender it would normally be considered irrecoverable.
  

As the loan will be managed by a platform, the platform would usually be in a position to determine
when a loan has become irrecoverable. The platform would then inform the lender that the loan
had become irrecoverable. [my emphasis]

Loans with security

Where loans are made against security, the loan would be treated as becoming irrecoverable as if
the security did not exist.

• If the lender or the platforms has entered into formal recovery procedures (collection,
  administration, receivership, seizure or liquidation of security, transfer to a recovery agent
  etc) the loan would normally be considered irrecoverable.
  

If the bad debt relief is given on an irrecoverable loan, and value is subsequently recovered from any
loan security then this would be treated in the same way as any other subsequent recoveries of
relieved irrecoverable loans (more detail in Unexpected recoveries)."

This drafting is open to criticism because entering into a recovery or insolvency procedure is not of itself evidence that a loan is wholly irrecoverable, merely that some part of it may be.  Do we get to provide for the expected loss at that time, or do we have to wait for more certainty?  I hope we get some clarification of this in due course.

However, this may only be a short-term issue because it is clear that HMRC will be relying heavily on the platforms.  In order to make the "same platform" relief from 6 April 2016 automatic, I think reporting on bad debts by the platforms will be integrated with their tax reporting (including the tax statements they give us) and hence we will get the relief when the platforms tell us that we can have it.

Platforms may also report bad debts to us for 2015/16 but it is not clear that they will be under any statutory obligation to do so.

The big issue remains of how to deal with loans that defaulted prior to 5 April 2015.  The desirable answer for these loans may be to recognise the loss as late as possible, but this is not what we will want for later defaults.  No doubt HMRC will want consistency, but it is not at all clear what HMRC expects the cutoff to be!