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Pay Tax to Your Borrowers!

By Matthew Howard on 15th December, 2014 | Read more by this author

According to Assetz Capital, business and property P2P lending company, businesses that borrow through P2P should technically withhold tax from individual lenders.

If true, it still doesn't affect P2P lending companies that have consumer borrowers. Just business borrowers.

On the Assetz website it says:

One significant area of ambiguity is with regard to repayments. Traditionally, any business borrowing money from a non-bank lender for a period of more than 12 months should pay the sum back, but withhold interest at the relative basic tax rate. The lender may claim this amount back at the end of the tax year, or pay more, depending on the actual rate of tax that they pay.

It’s important to note that this issue is not specific to Assetz Capital – it affects all peer-to-peer lenders, and indeed, all non-bank lenders, where the loan term is more than 12 months.

As far as we’re aware, this has never been enforced in P2P lending, and we have no knowledge of any P2P borrower that has repaid in this way. HMRC has allowed P2P platforms to ask lenders to file their own Self-Assessment returns whilst asking the platforms to confirm the amount of interest each lender has received. We are consulting with HMRC on this matter for clarity, and we are aware that HMRC plans to bring in formal rules for P2P and withholding tax in 2017.

If borrowers do withhold tax, lenders who do not pay tax can reclaim this amount in the normal way when they fill out their self assessment forms at the end of the financial year.

Smoke without fire?

This might be true, but other P2P lending companies with business borrowers, such as Funding Circle, have talked with HM Revenue & Customs and the government, and they have been told to continue doing what they're doing. New P2P tax laws are due within three years.

Indeed, Revenue & Customs has not bothered to enforce this law in over four years since the first business borrower borrowed from the crowd. As Assetz Capital notes, it has allowed the P2P lending companies to just confirm the amount of interest received by each borrower.

The government is doing everything it can to nurture the industry. One insider told us the government and regulator is moving with an energy not seen in decades in the banking industry. The government itself is lending to businesses through Funding Circle and other P2P companies.

If this does happen, who's going to send tax statements to the individual lenders? The P2P lending company can't just give our names and addresses away to the businesses. So the P2P lending companies themselves will have to do the statements, and they will probably have to deduct the tax too.

Withholding tax is coming

In any event, P2P lending companies are probably going to have to start withholding income taxes at the basic rate soon anyway, like Banks do in savings accounts. This won't affect you if you're lending in a P2P ISA, which should be coming even sooner, in 2015.

Withholding tax Impacts non taxpayers the most, since they will have to pay tax they dont owe up front and then claim it back in their tax return.

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