Income tax: crowdfunding and Individual Savings Accounts
Published 9 August 2016
© Crown copyright 2016
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Who is likely to be affected
Individual investors in debt securities (such as bonds) offered via a crowdfunding platform and the businesses and charities that issue or arrange these investments.
General description of the measure
Interest, gains and other payments from certain debt securities offered via a crowdfunding platform will qualify for new tax advantages where these investments are held in an innovative finance Individual Savings Account (ISA).
Policy objective
The measure will increase the choice available to ISA investors, encourage the growth of crowdfunding, and may improve competition in the banking sector by diversifying the available sources of finance.
Background to the measure
At Autumn Statement 2014, the Chancellor announced the government would consult on whether to allow debt securities offered by crowdfunding platforms to be eligible for inclusion within an ISA.
HM Treasury consulted on this measure between 8 July and 30 September 2015 and published its summary of responses in November 2015. This confirmed that these securities would be made eligible for the innovative finance ISA from autumn 2016, following technical discussions with interested parties. HM Treasury also confirmed that it would continue to explore the case for including equity investments offered via crowdfunding platforms within ISA.
Activities of crowdfunding platforms are regulated by the Financial Conduct Authority (FCA), which applies rules designed to ensure that customers understand the risks of these investments and have access to information that allows them to make informed decisions. These rules also help to ensure that only appropriate types of investors can invest in these securities and that financial promotions are clear, fair and not misleading. FCA will continue to monitor the market for crowdfunding investments and can take further action to protect consumers where appropriate.
Detailed proposal
Operative date
The measure will have effect on and after 1 November 2016.
Current law
The account rules for ISA are set out in the Individual Savings Account Regulations 1998 (SI1998/1870) (ISA Regulations).
These Regulations provide for three types of ISA (cash ISA, stocks and shares ISA and innovative finance ISA), and specify the investments that can be held within each type of account. Securities, such as debentures or bonds, issued by a company are currently only eligible to be held in a stocks and shares ISA. In order to qualify, these securities must usually meet specified conditions in relation to listing or admission to trading on a recognised stock exchange - or otherwise be included within an investment trust or similar.
Proposed revisions
The ISA Regulations will be amended by secondary legislation to extend the range of securities that can be held in an ISA. Amendments will provide that debentures issued by companies and charities can be held in an innovative finance ISA where they satisfy certain conditions. Interest and gains from these investments will therefore qualify for ISA tax-advantages.
This change will enable certain company and charity debentures or bonds made available through a crowdfunding offer to be eligible for an innovative finance ISA. Eligibility will be subject to conditions concerning who issued the investment and how it was made available to the investor. Further eligibility conditions will be applied to provide appropriate investor safeguards and to prevent abuse of ISA tax advantages.
Various requirements of the ISA Regulations, including in relation to the information that account providers supply to HM Revenue and Customs (HMRC), will be updated or modified to accommodate these changes.
There will be no changes to the rules concerning investments which qualify for stocks and shares ISA. Debentures and other securities that currently qualify for a stocks and shares ISA will therefore continue to do so.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| Negligible | Negligible | Negligible | Negligible | Negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
The measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure will increase the choice available to ISA investors.
New tax advantages will be available for individuals who purchase qualifying debt securities. No individual will face additional tax costs as a result of this change.
The measure is not expected to affect family formation, stability or breakdown.
Equalities impacts
The tax-advantaged nature of ISA returns generally means gains are greater for higher rate taxpayers than basic rate taxpayers.
In its February 2016 analysis of loan-based crowdfunding (peer-to-peer) platforms and the innovative finance ISA, FCA identified a risk that certain investors with protected characteristics – including those with learning difficulties or cognitive limitations, individuals in or approaching retirement, and younger or more inexperienced investors – may not sufficiently understand the risks associated with investing in certain crowdfunding offers.
To mitigate these risks, FCA has focused in particular on the quality of disclosure, including financial promotions, to ensure that risks are adequately disclosed. Further details can be found in FCA Consultation Paper 16/5, concerning the introduction of the innovative finance ISA and the regulated activity of advising on peer-to-peer agreements.
It is possible that these risks could also apply to investments covered by this measure. The potential impact of this measure will therefore be kept under review.
Impact on business including civil society organisations
The main impact will be for firms that choose to offer qualifying debt securities within an ISA.
Any firm offering ISA will be required to meet general requirements that apply to all ISA providers. They are therefore likely to face set-up expenses, including those arising from the development of new systems for account opening and reporting to HMRC. However, the overall set-up cost for businesses is expected to be negligible.
The ongoing costs of being an ISA provider include those associated with processing ISA subscriptions and customer instructions in relation to transfers and withdrawals of cash, as well as reporting ISA information to HMRC. However, the annual ongoing cost of complying with the ISA Regulations is expected to be negligible.
It is also expected that this measure could increase access to finance for some businesses and charities by making the debt securities they issue more attractive to investors.
Operational impact (£m) (HMRC or other)
The cost to HMRC of implementing this change is not expected to be significant.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
All aspects of ISA are subject to ongoing review through compliance work and monitoring of ISA information submitted by account providers.
Further advice
If you have any questions about this change, please contact Helen Williams on Telephone: 03000 512336 or email at: savings.audit@hmrc.gsi.gov.uk
Declaration
Jane Ellison MP, Financial Secretary to the Treasury, has read this Tax Information and Impact Note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.