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07th Jan, 2016

Tax and Relief on P2P lending

Lets face it, HRMC have been pretty kind to us P2P platforms and lenders…

Legally, we could have been made to withhold tax on interest earnings at 20%. Lack of enforcement has been an indirect subsidy as it has allowed lenders to compound their gross earnings. P2P lenders are expected to declare their earnings on their self assessment forms, due imminently. Whereas platforms are required to submit an Other Interest report so that treasury are informed about who earns what.

The newly regulated P2P lending industry is growing up and the government is helping.

Things will change from 6th April 2016…

The UK government may offer relief to P2P lenders for irrecoverable loans. So lenders can use next year’s tax deductions towards current bad debt relief, allowing you to substitute one deduction for another. Hurray!

Interim rules have recently been published by Treasury, but will change once formalised. We’ll confirm once published, but we have an idea of what’s likely to happen. We’re expecting that platforms will need to deduct 20% of interest earnings as received from lenders. We will change the ‘Fees’ tile on the dashboard to ‘Deductions’ and show the detail on the pop-up.

The IF-ISA excludes ‘Wrapped’ microloans from taxation

So lenders without any taxable income cannot use bad debt relief. Unless they use more than one platform, in which case taxes accrued in one platform may offset losses from another.

We’ll have more info on the IF-ISA very soon.

rebuildingsociety CEO Daniel Rajkumar says:

“The Crown is sharing in some of the risk of lending to SME’s. Hopefully this will manifest itself with a widening of risk appetite and further support for the productive SME economy.

Equity crowdfunding enjoys great relief through EIS & SEIS, so its great to see similar incentives applied to credit based lending.”

It’s bitter-sweet

They say that the only things that are certain are death and taxes… We knew this was coming, so we’re grateful for the:

– all of which soften the pain.

Net earnings may not reduce

With gross yields near 15%, a 20% tax will clip yields to 12%, that’s an overall deduction of 3%. So on a portfolio of £100k invested, £3k which would be taxed can go towards bad debt instead. Many lenders without bad debt will have an allowance that can be traded for non-performing loans.

Total interest pay-outs are expected to exceed £1.5m for next tax period across all lenders, at 20% this would net the Crown circa £300k. This is about the amount we have in defaults, we are expecting to recover £100k, but defaults will rise as some businesses fail. If lenders are able to maintain losses below 3% of your portfolio (and yields at 15%) then you’ll suffer no more loss from bad debt, than you would from taxation.

Its important to re-iterate that decisions on interest earnings taxation is still pending, but we believe that from April 2017, platforms are likely to have to deduct 20% from most lenders (depending on their tax bracket).

Risk appetite…

We’re working on a ‘non-performing loans’ or ‘tertiary market’ where risk adverse lenders can sell underperforming loans however they wish and optimistic buyers may find a deal. More on that at the lender’s evening next Thursday.

Hope to see you there.

Photo credit to: Kadellar

20th Jul, 2015

P2P Weekly: UK P2P Record

Welcome to P2P Weekly, our weekly roundup of news in the peer to peer, crowdfunding and financial world that you simply can’t miss.

“UK Peer To Peer Finance Breaks New Record,” Forbes

The eight largest peer-to-peer lenders in the UK made £507.4m worth of loans in the second quarter of this year, breaking records once again for total lending in the sector.

“We have passed yet another milestone with our members facilitating over half a billion pounds of new loans in the last three months – at this rate we may hit £4bn by the New Year,” said Christine Farnish, chair of the Peer2Peer Finance Association. “Strong growth continues across all parts of the market, reflecting the increasing trust that both lending consumers and borrowers have in peer-to-peer platforms.”

“China Crackdown on Margin Lending Hits Peer-to-Peer Lenders,” Wall Street Journal

New pressures from the Chinese government may be squeezing the rapidly growing peer to peer market in the country. Citing a new directive from the China Securities Regulatory Commission cautioning against illegal trading, three leading peer to peer companies have said they will no longer facilitate loans that use stocks as collateral.

The heightened scrutiny is part of a broader effort by the Chinese government to stabilize markets. The Chinese P2P market reached 300 billion yuan (£31 billion) in settled loans in 2014, a substantial increase over the previous year.

“Even more on debt and democracy,” The Economist

“In other words, the debt is owed to the taxpayers of other nations, most of which are democracies. So any write-off of Greek debt can be represented as a loss to voters in other countries. One can argue, of course, that such losses would be notional; experience suggests, for example, that central banks can manage quite well with a hole in their balance sheet. But that is not how such schemes have been sold to voters. German voters were told that the creation of the euro would not involve bail-outs of other countries; that explains why the country’s leaders are so reluctant to let Greece off the hook.”

“Welcome to ‘the biggest change in banking for 400 years’,” Newsweek

A new piece from Newsweek has summarized the substantial benefits of peer to peer lending, calling it a refuge for investors who “like the idea of being on the right side of regulatory and technological upheaval.” Writes Ryan Ross: “P2P lending offers huge opportunities, mainly at the expense of banks, whose biggest margins are traditionally in unsecured lending. Herein is the layer of fat P2P platforms are guzzling, picking off the banks’ best customers. P2P platforms have also proved superior at harvesting and managing big data, and have lower cost bases than banks.”

“Booming Online Loan Marketplaces Draw U.S. Treasury Scrutiny,” Bloomberg

The United States Treasury Department has begun a public inquiry of the peer to peer industry in the country. The department seeks public comments to learn more about how the industry works and different types of financial activity happening within it.

“By soliciting public comments on this relatively new industry, we hope to better understand the potential for online technology to expand access to safe and affordable credit for consumers and small businesses,” Antonio Weiss, counselor to the Treasury Secretary, said in a statement.

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