P2P Guide

45 44 THE PRACTICAL ROUTE TO P2P THE PRACTICAL ROUTE TO P2P Taxes & P2P loans 8.4 Although it wasn’t always the case, the way loan interest from P2P lending is taxed and tax is reclaimed is the same as it is for any other interest received. Provided the P2P lender is liable to UK Income Tax, makes loans through FCA authorised P2P platforms and is the legal lender when the loan goes bad, they can set any loss from P2P repayment defaults against the interest they receive on other P2P loans, before the income is taxed. Additionally, any interest earned on P2P loans can be offset against any unused Personal Savings Allowance. However, P2P lending losses cannot be offset against gains from other types of savings and investments, although the loss relief can be carried forward for up to four years. Lenders who do not normally need to submit a tax return will only need to declare any P2P interest that they receive through the same platform after bad debts to HMRC. This can be done by contacting their local tax office. If the investor pays tax under Pay as You Earn (PAYE), their tax code will then normally be adjusted to collect the tax due on the interest earned. If tax has already been deducted on the full amount of P2P interest received, without a deduction for bad debts, the lender can make a claim for repayment. Any claims to set relief for P2P bad debts from one platform against P2P interest received through another platform, or to carry relief forward against P2P interest received in future years, must be made through a tax return. Platforms are required to report to HMRC on their investors’ regular accounts once a year, and within 60 days from the end of the tax year on IFISA accounts. It is important for investors to correctly declare their P2P earnings to HMRC (where appropriate) as we know that HMRC does look at this. In the last two years it has contacted P2P investors who appeared to have under-declared untaxed interest, after reviewing platform information and individual tax return filings. For more guidance on reporting interest and claiming losses from loans that default, go to: https://www.gov.uk/guidance/peer-to-peer-lending Personal Savings Allowance Since April 2016 basic rate taxpayers have been able to earn up to £1,000 in savings income tax-free, while higher-rate taxpayers get a £500 allowance. This equates to a maximum potential annual saving of £200. But, additional rate taxpayers are not eligible for any relief. Basic Rate Taxpayer Higher Rate Taxpayer • £20,000 invested • 5% annualised return • £500 interest • £500 PSA offsets all income tax due + • £500 PSA remaining to use in tax year • £10,000 invested • 5% annualised return • £500 interest • £500 PSA offsets all income tax due Case Study: P2P loans are currently not classified as Retail Investment Products (RIP), so firms offering an Independent proposition are not obliged to offer advice on them. Those that do have the option to offer advice on the basis of whole of market, single product, panel or from a range of products and they need to decide which is most likely to meet the needs of their clients. Paradigm’s regulated consultancy view is that new products bring new opportunities which in turn bring new risks. So, before any advice is given, advisory firms should put in place systems and controls to mitigate this potential new risk and evidence that advisers are competent to give advice on such arrangements. That means verifying that suitable professional indemnity insurance is in place and, in certain cases, firms may be asked to let the insurers know what processes and procedures have been established to mitigate new potential risk. DUE DILIGENCE When it comes to products to recommend, robust due diligence must be undertaken on both the product and providers which will include challenging the provider to ensure their risk description is the same as the understanding the advisory firm has of it. In addition, firms need to build a picture of the provider to confirm they are who they say they are and to get an understanding of their experience and track record. NEW SYSTEMS AND CONTROLS Firms should establish a process which shows the research and due diligence process that will be followed when making a recommendation. It is also essential to clearly disclose at the start of the advice process what range of advice is on offer in standard disclosure documents and for a considered explanation of these products to be included within Suitability Reports, including clarity regarding FSCS coverage. ADVISER COMPETENCE Before an adviser begins to provide advice in this area, they should be assessed to ensure their knowledge, experience and skills are sufficient. Paradigm would suggest that the firm review its own Training & Competence scheme to make sure there is a person with sufficient skills and experience of their own to assess and supervise an adviser in this area. We suggest that an adviser’s CPD and qualifications should be taken into account. A knowledge check may be undertaken in the form of a role play, checking the adviser’s understanding of the risk profile in comparison to other asset classes and their presentation of P2P products. It is also recommended that a pre-sale check is completed on the first few cases just to verify that all is well with the advice. Graeme Stewart Compliance Partner, Paradigm Group