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Post by taavi on Mar 31, 2014 9:16:41 GMT
I'm currently awaiting a response from my accountant as to if my spreadsheets (which do take account of interest rates on a daily basis are acceptable) but if they are all I would require is a daily statement of transactions. However the 'question' I would have is if it is provided (as currently) as a .csv file how can I persuade the IR that I haven't altered it?
So in essence this would be a report with 365´ish rows (every day that any transactions were made) and the columns would have to include: - Date
- Sum of Interest earned on that day
- Sum of Late Charges earned on that day
- EUR/GBP exchange rate on that day and/or sums in GBP after conversion?
- anything else?
Edit: Remembered that UK investors need to report investments to different countries separately. So it would have to have different rows for different countries also?
From the resale perspective though, would you need to see every single transaction separately (e.g., buying a loan A cost 50€, fees 0.75€ , outstanding principal was 60€, sold it for 55€, fees 0.83€) or would it also suffice to give daily totals for price, fees and outstanding principal for all purchases and sales made each day (e.g., loan A and loan B together cost 100€, fees 1.5€, outstanding principal was 70€, loan A, loan C and loan D sold for 125€, fees 1.88€ and outstanding principal was at the time of sale 122€)? Any other info that would have to be there?
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duck
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Post by duck on Mar 31, 2014 9:56:24 GMT
EDIT taavi we were obviously posting at the same time so I will read your post and then make any further comments in another post!
My understanding from my correspondence with HMRC, research and past experience is as follows (strict interpretation of the HMRC rules - their website information is, not for the first time, misleading)
Interest has to be accounted for
1. By country from which it was paid, I have interpreted this as meaning Estonia, Finland, Spain etc not lumping this all under 'payment from Estonia'.
2. Interest has to be converted Euro to Pound at the interest rate that applied on that day. (HMRC said I could not use the averaged rates that they publish!)
Whilst all the countries need to be distinguished calculations are based on the total figure. (see also fees below.)
Then you get to the interesting points
Penalties These are by their nature not 'interest' but do form 'income' so should be declared.
Aftermarket Sales I am not totally clear as to how the IR views this. If you sell at a profit you make a capital gain which means it should be accounted for separately. If you sell at a capital loss the same applies. What has proved acceptable for me in the past (my accountants view this as correct) is to class these as Capital Gains/Losses (for which capital loss relief is available if there is any Capital Gains tax due) - this is entered on the self assessment form.
Defaults These cannot be offset directly against interest but they can be rolled up with capital gains made from aftermarket sales.
isePankur fees It is acceptable to deduct these from interest earned if classed as a 'servicing fee'. Accepting that these are usually for parts sales it could be viewed that these should be rolled up with the capital gains/losses but it is not unreasonable to have a servicing charge against the interest.
Obviously the above applies to individuals - I am not lending through isePankur with my Ltd Co - but Ltd Co requirements are different.
Needless to say I am not an accountant or money man of any form (actually mechanical engineer - so I like numbers and being pedantic!) so all suggestions and corrections gratefully received!
So in summary what I believe is required is a statement giving
1. Interest paid in each country (converted to £ on a day rate) 2. 'Servicing Fee' deducted from the total interest paid. 3. Statement £ of bad debt 4. Statement of any recoveries made. 5. Statement of profit/loss from loan sales.
I do not view it as reasonable to apply daily Euro/Pound conversions to items 2-5 perhaps an averaged rate for the year?
Unfortunately I am out of the country from this evening until the weekend and will have no Net access. Therefore carrying on this discussion will be difficult for me for a few days but I am happy to 'join in' when I get back.
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duck
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Post by duck on Mar 31, 2014 10:50:01 GMT
taavi
I think my previous post covers the 'requirements' of HMRC (obviously waiting on others to make any corrections) so to me the outstanding question is how is this most easily accomplished.
Obviously it would be nice to have a 'piece of paper' along the lines of what I wrote in my last post but I can imagine from your point of view having to separate out countries and daily interest rates for UK investors could present problems. If not that would obviously be the preferred method.
Personally I have put together a simple spreadsheet that I add to weekly (using the downloaded .csv file) and exchange rates that I take from www.xe.com/currencytables/?from=GBP&date=2013-08-05 and this separates out countries, interest, penalties etc and then performs the conversions - not a big task. The only potential issue I see with this approach is that the .csv file can be 'tampered with' (for instance I delete all 'booked' entries) but assuming that the downloadable files will remain accessible I cannot see how this approach would be successfully challenged by HMRC.
I need to get the view of my accountants but unfortunately that will have to wait until I return from France.
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james
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Post by james on Mar 31, 2014 11:51:12 GMT
So in essence this would be a report with 365´ish rows (every day that any transactions were made) and the columns would have to include: - Date
- Sum of Interest earned on that day
- Sum of Late Charges earned on that day
- EUR/GBP exchange rate on that day and/or sums in GBP after conversion?
- anything else?
Edit: Remembered that UK investors need to report investments to different countries separately. So it would have to have different rows for different countries also?
Yes, different countries. For the interest reporting a one page summary report could be this: Country1 Total interest in GBP Country2 Total interest in GBP ... Grand total interest in GBP from 6 April 2013 to 5 April 2014 inclusive That is all HMRC would want from most people unless they did an investigation. If they did an investigation they would probably want daily numbers for each country, so: Country 1 Day 1 interest payment 1 in Euro (or whatever currency), exchange rate, interest payment in GBP interest payment 2 ... ... Day 2 ... Day 3... Annual total for country 1 Country 2 .... and a final grand total. Most people would not be asked for this but some way of getting it would be needed. Not just daily summaries for each day in each country but each payment because a tax investigation is in effect an audit of the accounts, so all detail is needed. The document SA106-notes.pdf has the information that has to go on the tax return. Pages FN5 and FN6 are the ones that tell you what this post says for the summary page, so you can see why this post meets that need for the tax return. The audit is more of an assumption that they will want to know about every payment.
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james
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Post by james on Mar 31, 2014 12:07:37 GMT
I'm more uncertain about resale handling. From the resale perspective though, would you need to see every single transaction separately (e.g., buying a loan A cost 50€, fees 0.75€ , outstanding principal was 60€, sold it for 55€, fees 0.83€) or would it also suffice to give daily totals for price, fees and outstanding principal for all purchases and sales made each day (e.g., loan A and loan B together cost 100€, fees 1.5€, outstanding principal was 70€, loan A, loan C and loan D sold for 125€, fees 1.88€ and outstanding principal was at the time of sale 122€)? Unfortunately, yes, in a details section we need every transaction separately. HMRC provides an introduction to Capital Gains TaxFor the one page annual statement a total of all sales for a profit (after allowing for fees) and all sales for a loss (also after allowing for fees) for each country and a grand total would be enough. You can see the "Property and other assets and gains" section of SA108.pdf for the summary we need for a normal human person. There is a notes document sa108-notes.pdf that gives more instructions. But splitting gains and losses is needed for more detailed reporting, including if there is a need to claim a loss that can be deducted from profits in future years. Here's the most relevant section of sa108-notes.pdf that tells you what you'll need to provide in details: Page CGN 10 " 1 Start with a full description of the asset (for example, number, type of shares sold and the company’s name or address of the building or land) and the date of sale . If the disposal was between connected persons, say so.
2 Next, enter the sale proceeds or market value , as appropriate, taking off the incidental costs of selling the asset to give you your net disposal proceeds.
3 Now enter the date of acquisition and work out what the asset has cost you over your period of ownership; that is, the acquisition cost (reduced by any earlier claim to tax relief, if applicable) plus any incidental costs of acquisition and improvement costs .
4 Take the total costs away from your net disposal proceeds to work out the gain or loss.
5 Enter any capital gains reliefs (see pages CGN 18 to CGN 20) claimed or elections made, and show the capital gain after any reliefs or elections.
6 Total all your gains (including gains of earlier years taxable this year) and losses for the year.
7 Deduct losses from gains to reach the taxable gains. Use losses of the year before losses brought forward from earlier years. You only need to use enough losses brought forward to reduce the total of all your gains to the annual exempt amount where due (see page CGN 2) for the year." I'll translate that into something closer to a specification for you in the next post. |
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james
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Post by james on Mar 31, 2014 12:58:39 GMT
So what do we need from you for capital gains? The answer is that I'm not yet sure. I tried to ask specific questions today but was told by the capital gains tax helpline part of the self-assessment helpline that the question would have to be answered by a tax inspector because the generalist didn't know the answer. No inspector was available at the time of the call. Mondays are busy days, 09:30 on other days tends to be a more quiet time. So: A. Please do the income tax part, because that part is already well understood. It is also the main need for all of us and there is no chance of us being able to avoid that part (unless we completely ignore tax law). B. I am going to continue trying to get a more definitive answer. I suggest not writing code based on what follows. I hope that I will be able to get an answer that will be more certain from HMRC. What follows applies logic. This may not apply to tax return requirements. Easiest part first, the underlying data for a report that has to be used: 1. The price paid for the loan if it was purchased instead of obtained by a normal bid. Converted to GBP on that date, not sale date. I think this is not needed but we should have it available) It might also be necessary to have all of the monthly repayment capital payment details but I hope that HMRC will not ask for that. 2. The fee paid for that purchase (because this increases the effective purchase cost). Converted to GBP on that date, not sale date. 3. The capital outstanding at the time of sale. Converted to GBP on that date. 3b a worst case requirement: they might want every repayment of capital from the purchase date and amount to the sale amount, and converted to GBP each time, to work out what the value being sold is and use that instead of capital outstanding. 4. The sale price. Converted to GBP on that date 5. The fee paid for the sale (because this decreases the effective sale price). Converted to GBP on that date. These requirements come from that list of items from the previous post, they are the data needed for it. Interest is not included because that is income tax, not capital gains tax, different part of the tax return and different tax rates. So a summary report would be the total gains and losses from the summary page in the tax return I linked to. But for the details it is more like those 1-4 points for each sale, grouped by country with all currency conversions done for the date of each part of the transaction. So: Country 1 Loan 1 (3:capital outstanding),(2:fee to buy, if bought loan),(4:sale price),(5:sale fee), ... profit or loss: (4-5) - (3+2) Loan 2... ... Country 2 That logically would be correct ... but in the worst case they might say that they want all payments since purchase reported, or maybe only if the loan was purchased instead of bid for. That's because they might consider the effect of the exchange rate for each loan repayment to be significant. The calculation above would be a good approximation, enough for a good faith estimated tax return and good enough to tell us whether we have a need to report. So I suggest that you do no sale and purchase for now, and I'll see if I can get a better answer from HMRC. However, the big deal is the interest and income tax, so you can proceed with that. Capital gains tax is probably not yet an issue for many of us, if any. So there is more time to deal with this part. Probably not yet an issue because of the tax free allowance for this, so for most or maybe all of us we will not yet have passed the threshold where we must report it. The logical calculation would be good enough to tell us if there is a potential need for more. |
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james
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Post by james on Mar 31, 2014 13:12:24 GMT
Defaults.
There is a specific part of UK tax law that prohibits an individual person from deducting losses from defaults from income. Z o p a originally got this wrong until they were pointed to the specific bit of law. I do not think that it is permitted for an individual person to treat these as capital losses either but I am not sure of this.
A business lender can do more with this, they can do things like reducing their corporation tax bill by the loss and adding recoveries to future year tax liabilities. I cannot say more about this, I do not know much about this subject.
Fees
The isePankur purchase and sale fees affect the price for resale and are covered there in the capital gains tax reporting. Unfortunately for us this in practice means that we just lose the money because there will usually be no tax to pay that the fee could be deducted from. I do not know why duck thinks that it is OK to deduct purchase and sale fees from income when they are charged for transactions that are not income.
If isePankur had a fee for being a lender or charged a percentage of the total value of loans outstanding that fee could be deducted from income. It is at Z o p a.
Foreign exchange fees
These can be deducted, either from income for interest or for capital transactions. Since we do not exchange currency at the time of purchase and sale transactions the cost would be deductible at the time we pay in or take out money. I keep track of this and have already used this cost for paying money to my isePankur account for one tax return.
I will try to get more definitive answers from HMRC about these things.
Duck, can you say whether you agree with the income reporting I've described? That way isePankur can get started on that part? Can you say more about any of the areas where we have written different things to help me to try to get more certain answers directly from HMRC?
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duck
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Post by duck on Mar 31, 2014 14:11:57 GMT
Sorry james, no time left, ferry to catch!
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Post by taavi on Mar 31, 2014 14:22:41 GMT
I was trying to figure out how to put the country thing into CSV file in the way that you could still operate with the data and this is the solution that came to mind. bondora.mybalsamiq.com/projects/investmentprofiles/prototype/UK%20income%20report?key=c2e7c6f3500701caf403a1b160ac393effe8f8d3A few questions though: - What accuracy would this have to have? By this I mean, how accurate exchange rate has to be (how many numbers after the comma) and is there some specific exchange rate provider/time of day that has to be used for this?
- How accurate would the converted amounts have to be? Can they be rounded up/down from .05 or are there other requirements?
- Would the timezone difference have any effect on the report? I understand there's currently 2 hour difference and reports are created by Estonian timezone, meaning that payments received +-2 hours from midnight could be one day early or one day late if the reporting has to be done based on local timezone.
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james
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Post by james on Mar 31, 2014 15:50:56 GMT
I asked the HMRC helpline those three questions and here is the summary of the answers that I received that covers all three questions: "we'll accept anything reasonable". They are more worried about deliberate wrong numbers than people trying to be reasonably correct. I explained that as well as for my own tax return, the answers would be used to calculate the numbers for all other UK tax payers to use.
Same answers for each with more detail saying the same thing:
1. Whatever is reasonable. I mentioned ECB daily interest rate and they said that is OK. I assume that is five digits to the right of the decimal point. Since you have as many as they provide, you might as well use them all. If you can use many different ECB rates, pick one and be consistent using the same one each time. Pick whatever you can get conveniently is what I suggest. I assume that is ECB end of day rate.
2. Whatever is reasonable. I asked specifically about receiving 30 payments in one day in Euros and whether I should convert each payment and add up the total in GBP or add up all in Euros and do one conversion each day. Either way is OK, whatever is reasonable.
3. Whatever is reasonable here as well, though with the note that that questions about time zones were not something they get every day, meaning very uncommon question.
The general test they would use is what is reasonable and does it make a tax difference? When reporting these things on the paper tax returns we are told to round the income down to the nearest ten Pound level. Not so for the online version but that round down guidance should tell you that the possible rounding differences aren't going to be considered significant by HMRC.
I suggest that you calculate the Euro total for each day and convert that total to GBP using the most precise exchange rate provided by the ECB for that
day, using scientific rounding for the end of day calculation. If it is not hard to do the time zone conversion, I suggest that you use UK time zone. If it is difficult, use Estonian and rely on the whatever is reasonable guidance.
I did not ask this question but I think the "whatever is reasonable" guidance covers it: what about lending in a country like the Czech Republic that does not use the Euro, how do you convert? I think they would accept convert Krona to Euros then to Pounds or directly from Krona to Pounds. As a programmer I'd probably use direct Krona to Pounds.
Your example looks good.
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james
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Post by james on Apr 1, 2014 1:05:03 GMT
Now I think more about buying loans for income, it seems logical to me that the purchase fee could be deducted from interest income. There may never be a sale of the loan.
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Post by ajscotland on Apr 4, 2014 19:28:58 GMT
I speak as a former civil engineer and wonder whether this is all being over-engineered To quote James "The general test they would use is what is reasonable and does it make a tax difference? When reporting these things on the paper tax returns we are told to round the income down to the nearest ten Pound level.... etc". Income taxInterest is paid without tax deducted, via Estonia. Does is really matter what country the borrow was in - it makes no difference to the tax tax difference being paid The use of a personal spreadsheet that seeks to generate an exact income carries the risk that it contains an error. if challenged by HMRC it could take a huge amount of time to explain to an sceptical HMRC inspector If income was converted monthly and the official monthly spot rate used then this appears to be a pragmatic solution that is easily verifiable from independent sources namely Bondora and HMRC. link I would simple use a 12x3 table with columns for monthly income, conversion factor and GBP equivalent.
Capital gainsI suggest that for most investors the net gain will be well below their allowances so unless they have other large gains there is little need to know any-more than that monthly net gain or loss and apply the monthly exchange as above and calculate cumulative gain over the year. Only if the gains were material and leading to CGT would I seek to add in selling costs, etc. Challenge by HMRCIf I was challenged by HMRC as to the rate I would quote their website which say "If you are not sure of the exchange rate to be applied ask your tax adviser or go to hmrc.gov.uk/exrate" see page 5 in linkIf I was challenged by the lack of granularity then and only then would do the interest on a daily basis. If I was challenged about the use of a single country I would state that all interest in gross (i.e. no foreign tax has been paid so double taxation relief does not apply so there is no need to differentiate to calculate the correct tax); it is calculated and paid by an Estonian company on the basis of its own calculations of what interest is payable (i.e. there is no direct transaction with the person concerned) |
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duck
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Post by duck on Apr 5, 2014 8:06:47 GMT
Back from sunny France to a damp UK!
Briefly, taavi your example looks a good starting point, I would however like the fees to be added to the statement since I believe they can be of use (pending further discussion here!). I agree with james, the number of decimal places is not important when I made my initial enquiries to HMRC they stated "The exchange rate on a particular day is available via the Internet or a Financial Institution" (see below) - so since different sources that I have looked up have different numbers of decimal places a 'reasonable' number is appropriate.
ajscotland. Over engineering yes probably in the big scheme of things but this is HMRC that we are dealing with! I have copied below the HMRC response to my initial letter (probably not the best letter I have ever written!) and they confirm the need to separate countries etc(sorry formatting has gone). Most of what I was trying to get across (that all the guidance on their website is misleading/contradicts itself) appears to have missed the spot and I had no response to deduction of fees for pound/euro conversion.
Peer to Peer lending – Interest paid outside the UK.
I am currently lending and receiving interest through isePankur. www.isepankur.ee/home IsePankur is run in Estonia and as such the Euro is the currency involved. My investment is small and projected interest payments for the current tax year are below £2000 although this has the potential to increase above £2500. This is private investment and in no way linked to my business or work. I am ‘UK resident’. Tax will not be payable in Estonia.
In preparation for my ‘self-assessment return’ (2013 / 2014) I am looking at how the interest should be calculated. Please note I also invest in various UK peer to peer schemes so the general principles are understood.
Currency – exchange rates. In calculating interest received a conversion to GBP is required. Obviously this is a continuing variable throughout the tax year. Due to the nature of peer to peer lending (risk is controlled by having small parts in many loans) conversion to GBP at the rate applicable at the time that interest is paid is impractical.
I note from Supplementary Notes Self Assessment form states (FN5) All entries on pages F 2 and F 3 must be in UK sterling, not foreign currency. Your income should be converted to sterling at the rate of exchange that applied at the time when the income arose.
This appears less clear when reading www.hmrc.gov.uk/euro/rates.htm and www.hmrc.gov.uk/exrate/european-union.htm
Question What interest rate should I apply (note I do hold details of all rates applicable when currency was changed) can I apply www.hmrc.gov.uk/exrate/ if/as necessary?
Question Since costs are incurred in converting GBP to Euro (and visa versa) am I correct that these costs can be deducted from the interest received? Please note I am not referring here to exchange rate movements which I accept will have a beneficial/detrimental effect on the declared interest.
Through isePankur I hold loan parts in both Estonia and Finland (shortly Spain and others) Again due to the nature of the peer to peer process a requirement to separate loans (and interest paid) based on country would require monitoring and record keeping that would be vastly out of scale with the investments.
Question Since for Estonia, Finland and Spain all transactions are in Euro am I correct in assuming that country separation will not be necessary?
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james
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Post by james on Apr 5, 2014 8:37:06 GMT
ajscotland, HMRC requires that the interest income be reported for each country based on the country of the person paying the interest. Please read the SA notes I linked to and the quotes from HMRC that have been posted. This is peer to peer lending. There's always a transaction between borrower and lender or loan buyer and seller. Capital gains tax must be paid when the total gain from all items subject to capital gains is above the annual limit. This is for all capital gains that a person has in a year, not just the Bondora gains. Someone who sells shares or a house could have capital gains tax to pay. Even if no CGT is due, HMRC requires that people report their capital transactions when the total value of sales is four times the annual CGT allowance. Not just Bondora sales but all sales and for this it doesn't matter whether there was any profit or loss, it has to be reported anyway. |
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andy2001
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Post by andy2001 on Apr 6, 2014 2:32:44 GMT
ajscotland, HMRC requires that the interest income be reported for each country based on the country of the person paying the interest. Please read the SA notes I linked to and the quotes from HMRC that have been posted. This is peer to peer lending. There's always a transaction between borrower and lender or loan buyer and seller. Capital gains tax must be paid when the total gain from all items subject to capital gains is above the annual limit. This is for all capital gains that a person has in a year, not just the Bondora gains. Someone who sells shares or a house could have capital gains tax to pay. Even if no CGT is due, HMRC requires that people report their capital transactions when the total value of sales is four times the annual CGT allowance. Not just Bondora sales but all sales and for this it doesn't matter whether there was any profit or loss, it has to be reported anyway. Funding Circle claim selling loans above par does not count towards a capital gain, so this may also be the case here.
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