Temporary relief from withholding tax on peer-to-peer interest

HMRC has released a policy statement on the application of withholding tax to peer-to-peer lending: R&C Brief 2/2016. The statement allows payment of interest on peer-to-peer lending platforms to be made without the imposition of withholding taxes as an interim measure, pending expected changes of legislation in this area.

Background

Under UK rules, there is, subject to a number of exceptions, a requirement to withhold income tax from payments of yearly interest and account for that withholding tax to HMRC. The obligation to withhold tax will depend on a number of factors including the identity of the lender and the borrower.

The Government recently consulted on the application of the withholding tax rules to peer-to-peer (P2P) lending platforms, recognising that the application of the current rules is very complex for loans made through P2P platforms. The legislation is to be amended to clarify the application of withholding taxes to P2P loans following the consultation.

In high-level overview, the consultation proposed that whether withholding tax applies on interest paid through P2P platforms would depend on the status of the lender only, and not the borrower ie if the lender is an individual or is based outside the UK, the UK withholding tax applies, but no UK withholding tax applies on payments to UK corporate lenders. It also proposed that the P2P platform (rather than borrower, lender or intermediaries) would have sole responsibility for deducting and accounting for any UK withholding tax due. Thus the consultation strongly indicated that the likely outcome would still involve a withholding tax system applying to interest paid through P2P platforms, albeit on a different basis to the current rules.

Interim measure

Pending further details about legislative changes to be made, HMRC accept that the costs for P2P platforms in operating withholding tax obligations is disproportionate to the amount of tax collected. As such, HMRC have decided to allow the payment of interest free of withholding tax where such interest is paid by:

• a UK borrower to a UK P2P platform
• a UK P2P platform whoever made to, and 
• any intermediary to or from a UK P2P platform.

In each case, the P2P platform must be registered by the Financial Conduct Authority.

Comment

The easement is intended to be temporary and HMRC will release further guidance on this issue once changes to legislation have been announced. Nevertheless, it will come as a welcome temporary relief to many P2P platforms for which the application of withholding tax has proved a costly and problematic issue. However, it still appears likely that a UK withholding tax system will ultimately be applied to P2P lending platforms, once the changes resulting from the consultation have been implemented.