Policy paper

Bad debt relief for Peer to Peer investments

Published 9 December 2015

Who is likely to be affected

Individuals who invest in Peer to Peer (P2P) loans using lending platforms approved by the Financial Conduct Authority.

General description of the measure

This measure will introduce a new relief to allow individuals investing in certain P2P loans to set the losses they incur, from loans which default, against income that they receive from other P2P loans when considering their savings income for tax purposes.

At Summer Budget 2015 the introduction of the Personal Savings Allowance was announced. This will exempt the first £1,000 of savings income from tax for basic rate taxpayers and the first £500 for higher rate taxpayers. An individual’s Personal Savings Allowance will apply to interest they receive from P2P lending after any relief for bad debts.

A technical guidance note for the relief has been published alongside the draft legislation.

Policy objective

This measure ensures that people who invest in P2P loans are subject to tax on the return that they make from their lending portfolio as a whole. The government is determined to increase competition in the financial sector, where new firms such as P2P platforms can thrive alongside the established players and compete to offer new and improved services to customers. This new relief will create a level playing field for the taxation of income from P2P lending when compared to the taxation of traditional forms of retail investment available from those established players.

Background to the measure

This measure was announced at Autumn Statement 2014 and a technical note outlining proposed criteria for the tax relief was published alongside the March 2015 Budget.

Detailed proposal

Operative date

This measure will have effect for losses incurred on all P2P eligible loans on or after 6 April 2016. It will also allow individuals to make a claim for relief on losses arising on eligible P2P loans between 6 April 2015 and 5 April 2016.

Current law

Under section 370 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), the full amount of the interest arising in the tax year is subject to the charge to Income Tax.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 so that tax is charged on the amount of interest received from eligible P2P loans, made through an authorised P2P platform, after bad debts have been taken into account.

This will be achieved by introducing a new tax relief against P2P income in Part 8 of Income Tax Act 2007.

This relief will automatically apply from 6 April 2016 to set bad debts arising on eligible P2P loans against interest received in the same tax year from other eligible P2P loans made using the same P2P platform.

In the case of bad debts arising on eligible P2P loans between 6 April 2015 and 5 April 2016, investors in P2P loans will be able to make a claim to set those losses against interest received in the same tax year from any other eligible P2P loans.

From 6 April 2016, investors in P2P loans will also be able to make claims to set bad debts in excess of the interest that they receive during the tax year on eligible loans made using the same platform sideways, or to carry them forward:

• excess bad debts arising on eligible P2P loans made through one platform will be available to set against interest received from other eligible P2P loans made through other platforms

• excess bad debts arising on eligible P2P loans in one tax year will be available to set against interest received in the next four tax years from other eligible P2P loans

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020
nil	-10	-15	-20	-25

These figures are set out in Table 2.1 of Autumn Statement 2014 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2014.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will apply equally for the benefit of all individuals who invest in P2P loans. The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is recognised that some consumers in vulnerable circumstances may face particular problems with accessing financial services and it will be important that communications are suitable for intended audiences. The measure is expected to provide the greatest benefit to taxpayers receiving significant amounts of savings income. The new relief for bad debts will apply to all individuals, and no disproportionate impact is anticipated in respect of groups with protected characteristics.

Impact on business including civil society organisations

Relief for bad debts on loans is already available for businesses within the charge to Corporation Tax through the Loan Relationships legislation.

This measure will allow relief for P2P lenders who are within the charge to Income Tax, including sole traders. There will be no one off administrative costs in order to claim this relief and any necessary claims can be made in a Self Assessment return.

As businesses within the charge to Income Tax currently make very few P2P loans, it is anticipated that the impact on business will be negligible.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

It is not currently anticipated that HMRC will incur any significant additional costs in implementing this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored on an ongoing basis to establish whether the conditions put in place in order for the loan to qualify for relief are suitable and whether they achieve the stated policy.

Further advice

If you have any questions about this change, please contact Charlotte Hopwood on Telephone: 03000 585950 or email: charlotte.hopwood@hmrc.gsi.gov.uk