Her Majesty’s Revenue and Customs (HMRC) department, the agency responsible for the collection of taxes, has published its current “position” on the requirement to deduct income tax on interest paid on peer to peer loans.
According to HMRC, under existing tax rules in Chapter 3 of Part 15 of the Income Tax Act 2007, there is a requirement to deduct income tax from certain payments of yearly interest. The HMRC states that whether, or not, the tax must be deducted from a payment depends on the identity of both the borrower and the lender. HMRC recognizes that peer to peer lending is an arrangement where many individuals and/or entities fund individual loans thus creating a complex situation in accessing tax. HMRC states the government is in the process of “changing the obligation to deduct tax from interest paid on P2P loans”. Interim treatment calls for interest payments will be made without any deduction. This is understandable as the cost associated with the small amount of tax on the “many” investors would be “disproportionate”. Once the government figures everything out the HMRC will return with more information and an updated approach.
The lender / investor must treat returns similar to any other form of interest and notify HMRC and pay the correct amount.