As a disruptive technology to the banking system, P2P platforms stand outside some of the tax rules drawn up specifically for banks and building societies. UK withholding tax at 20% could apply to borrowers and platforms, and HMRC are reviewing these rules to see if they remain appropriate now this tax is to be abolished for banks and building societies. While the review is being carried out, HMRC has removed the tax.
HMRC have removed withholding tax obligations on payments of ‘yearly interest’, by concession. This concession applies to interest payments made by:
- A UK borrower to a UK P2P platform.
- A UK P2P platform whoever made to.
- Any intermediary to or from a UK P2P platform.
In each case the P2P platform must be authorised by the Financial Conduct Authority (including interim authorisation – note interim authorisation ceases from April 2016).
As a concession, this will not apply to arrangements set up for the avoidance of tax. But it does provide comfort that general P2P platform operations matching multiple lenders with a pool of borrowers do not need to make expensive changes to their systems at this stage.
Because of the matching process, the imposition of a withholding tax obligation would cause complexity and cost for P2P platforms. Each small payment of interest would need in principle to be checked as to the end recipient’s status – with pension funds and UK companies receiving payment gross, while 20% withholding could apply to payments overseas and to individuals.
Ultimately none of this changes the end position for UK lenders. Under current law and government proposals, UK based lenders are subject to tax on their receipts, through self-assessment. From April 2016 though, the first £1,000 is tax free.