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

duck - re your first question, I think perhaps HMRC are relying on this tension in order to stop losses being recognised too early! It's easier for them to do this than to write proper guidance, which they have signally failed to do.

Good question re provision fund accounts. Logically lenders should get no relief unless and to the extent that they have suffered losses.  But AFAICS this is not what the draft legislation actually says.  This ought to be fixed.

rufus - that would certainly be a reasonable approach.  Have you any inside track on this?  No need for you to break cover, but I note it's your first post . Unfortunately, it does not deal with the more significant issue of to what extent losses on loans that went into default prior to 6/4/2015 will be admissible (on the grounds that they did not become irrecoverable until later).

As I read it, tax relief is available for provision fund covered loans unless assignment of the right to cover was made at the time the loan was taken out  how that quite fits in with existing 'paperwork' for loans made in 2015/2016 I have no idea but I can see some amendments being needed if provision fund covered accounts are to continue in their current form.

Thanks.  I will be taking a similar line unless and until contrary guidance appears...

Good find, pikestaff - much appreciated.

I think I am likely to take a similar stance.  I don't think defaults can really come into play wrt any claims to offset losses - a default could be as innocent as a late payment and does certainly not always point towards a loss.  As I think the guidance seems to suggest, the only interesting default which HMRC will vaguely be interested in is when a formal procedure is entered into - e.g. receivers appointed - until then, I don't think it would be sensible even to consider an opportunistic claim.  I am not in a huge hurry and will be content to wait and claim for the loss once the loan seems to be irrecoverable....yes, there will be a little bit of tension between platforms and lenders....but even platforms will not want to expend their energies informing lenders for the umpteenth time that there has been no progress in recovery this week.

Simply waiting for the loan to be irrecoverable also keeps things simple; no need to draw unwanted attention from HMRC by "unclaiming" some of the loss.

If I were a platform, provided I had behaved transparently and honestly, and exhausted all reasonable avenues, frankly I'd be glad just to be shot of the damned thing.

Would certainly be great if the platform(s) could automatically deduct my losses when reporting my interest payments for the year - the more I can keep my self-assessment simple, the better.

It looks as if the GOV info you have been discussing has been removed

www.gov.uk/government/publications/peer-to-peer-bad-debt-relief-proposed-technical-criteria

The page you're looking for is no longer available

The information on this page has been removed because it was published in error.



This publication was withdrawn on 24 December 2015. For current information please refer to Bad debt relief for Peer to Peer investments published on 9 December 2015.

Interesting!!

Does anyone have a softcopy of the document before it was removed?

A very useful discussion, thanks Pikestaff and others.
The question of when a loan is considered irrecoverable is key. My experience is with FC and I would think that it would be convenient to equate 'irrecoverable' with defaulted - even though that sounds rather odd, especially on secured loans. At present on FC accounts when a loan is defaulted the whole outstanding capital then becomes a loss on accounts and all further payments to the lenders become recoveries - even payments made by the borrower before default but not distributed (because they can distribute only full monthly repayments prior to a default). Before the default there are defined elements of interest which are taxable (in FC's tax statement) but after default there are no payments taxable to income.
I imagine it would be easy to offset all the new losses in a fiscal year against tax and to add all recoveries received in the fiscal year as taxable - using the existing statements of losses and recoveries. But to do that using some different trigger point after default would be very difficult, even if that trigger could be defined. The tax position of losses and recoveries occurring in the time between the two events would be tricky. Perhaps pragmatism will triumph, and considering that recoveries will become chargeable to tax, it might be agreed that default and the point of irrecoverable loss for tax purposes may become aligned, perhaps with some change to default practices. I bet that operators will be pushing that in consideration for doing the tax calculations.

Consider loans with a 30% and higher first year default rate and recoveries varying between 10% and 50% of the defaulted amount depending on the loan's broad properties, like country of borrower, taking several years for recovery. Default and irrecoverable are too dramatically different for me to think that HMRC will agree to use default as equivalent to irrecoverable. Even in prime rate relatively low default ranges, let alone the non-prime and payday lending that some P2P is involved in.

I'm surprised that HMRC have written that they will disregard security and allow amounts to be called irrecoverable that are likely to be recovered from the security.

I do agree that it would be convenient to just use default and count recoveries from that, it's just that this is not advantageous for HMRC because it allows the relief early on and for more than the actual likely loss. While irrecoverable in a consumer loan might require waiting six years from last contact before the debt become statute barred and can be considered irrecoverable, absent some form of insolvency. Fraud losses may be even worse - maybe having to wait for the statute of limitations to expire, whenever that would be, in case the culprit is found and pays restitution?

All in all for consumer debt I'm unimpressed by the approach that HMRC appears to be taking, which appears likely to result in loan books being very mature before there will be substantial relief, long after the tax has been paid on the income that's supposed to cover the losses. Except in the case where there are protection arrangements and assignment to the protection fund, where it appears that the investor can consider any loss after protection fund payout to be an immediate loss for tax purposes, while the protection fund has to wait for whatever trigger HMRC wants before writing off itself.

The HMRC rules appear for consumer lending to very strongly favour arrangements where loans are transferred at default to some collection setup, so original lenders can declare an immediate loss. A minimally funded collection setup might pay say a penny in the Pound leaving a 99p default loss. Then the collection setup might pay any excess over the 1p value to the investors as a "discretionary" payment, just as protection funds are discretionary today. At which point HMRC may scream and say it's a tax relief sham. While a well funded setup might pay 100p in the Pound and not anticipate ever paying any more after recoveries. The former type has HMRC funding it short term in arrears via tax relief, the latter has lenders funding it via the extra charges levied on borrowers and the effect that has in reducing the interest rates paid to lenders.