Finance Bill

Written evidence submitted by the Association of Taxation Technicians (ATT) (FB 02)

Finance Bill 2016: Clause 32 - Income tax relief for irrecoverable peer-to-peer loans

A Introduction

1 Clause 32 introduces a measure of income tax relief for peer-peer (‘P2P’) lenders if one or more of their loans becomes irrecoverable.

2 Paragraph 1 of the Explanatory Note to Clause 32 explains that the clause "introduces a new tax relief that will allow lenders subject to Income Tax on interest that they receive from peer to peer (P2P) loans to set losses from irrecoverable loans against other P2P interest that they receive."

3 Paragraph 8 of the same Note states:

"From 6 April 2016 relief is given on irrecoverable P2P loans whether or not a claim is made. This means that a loss arising from a loan that becomes irrecoverable on or after 6 April 2016 will no longer be eligible for any relief under TCGA 1992."

4 The statement in that paragraph 8 prompted the ATT to question HMRC about the situation where a P2P loan became irrecoverable at or shortly before the time when the lender was ceasing their involvement in P2P loans as it appeared that their loss could be ‘stranded’ in the absence of available interest against which the loss of capital could be set.

5 The response from HMRC indicated that, contrary to the statement in paragraph 8 of the Note, relief could be eligible for relief under CGTA 1992 in the circumstances identified.

6 The purpose of this written evidence is to highlight the divergence between the statement in the Explanatory Note and the subsequent interpretation indicated by HMRC in order to enable clarification on the point to be established in any debate on Clause 32.

B ATT Comments

1 Briefly stated, relief for a loss under the Clause 32 provisions can be given in three distinct ways:

· By set-off against the interest arising in the same tax year from either the same loan or any other P2P loans made through the same operator (ie the same ‘platform’) [Section 412A];

· To the extent that relief cannot be given under s.412A (and upon a claim by the lender), by set-off against the interest arising in the same tax year from P2P loans made through operators other than the one through whom the irrecoverable loan was made [Section 412B];

· To the extent that relief cannot be given under either s.412A or s.412B (and upon a claim by the lender), by set-off against interest arising in the next four tax years from P2P loans (whether or not made through the operator through whom the irrecoverable loan was made) [Section 412C and 412D].

2 The combined effect of section 412A(1) and (2) is to make loans that became irrecoverable between 6 April 2015 and 5 April 2016 eligible for the relief but only if the taxpayer chooses to make a claim for the relief. Paragraphs 6 and 7 of the Explanatory Note indicate that in the absence of such a claim in respect of a loan that became irrecoverable between 6 April 2015 and 5 April 2016:

· The irrecoverable loan will not be eligible for income tax relief under the new provision but

· The loss may be eligible for relief as a capital loss under the Capital Gains Tax (‘CGT’) provisions (CGTA 1992).

3 By contrast, relief is given under section 412A(1) without the need for any claim if the loan became irrecoverable on or after 6 April 2016. Paragraph 8 of the Explanatory Note (quoted in full in A.3 above) indicates that such an on or after 6 April 2016 irrecoverable loan "will no longer be eligible for any relief under TCGA 1992". That statement appeared consistent with the prioritisation of Income Tax provisions over CGT provisions.

4 As outlined in B.1 above, the proposed legislation provides for a variety of routes to income tax relief. The extent to which any of these will be available to (or effective for) a particular P2P lender will necessarily depend on the extent, pattern and timing of their P2P lending activities.

5 By reference to the Explanatory Note, the ATT identified one particular circumstance where the provisions appeared to offer no (or only very limited) relief. That was where a P2P loan became irrecoverable on or after 6 April 2016 and at or towards the end of a lender’s involvement with any P2P lending. In such a late-arising loss situation, the lender might well have little or no current year interest from P2P lending (meaning that the scope for relief under section 412A and 412B was limited or non-existent) and no prospect of carry-forward relief under section 412C.

6 When the ATT questioned the apparent ‘stranding’ of such late-arising losses, HMRC responded in the following terms:

"We do not believe that any amendment to the legislation is needed as the prohibition against Capital Gains Relief is created by the priority of Income Tax Reliefs over Capital Gains Reliefs. This means that in an exceptional situation, such as you have outlined, where the investor cannot legally claim Income Tax Relief then the rules the preventing a claim to Capital Loss Relief would not apply and a claim may still be made.

This is also the case where the amount of Income Tax Relief is limited to less that the amount the investor has lost (for example if they purchased a second hand loan above par value). Excess losses that are not eligible for the new Income Tax Relief may also continue to be eligible for Capital Loss Relief.

However we do see that the wording used in the published (Explanatory Note) in unclear in this area as it only refers to cases where Income Tax Relief is given. Following your comments we will include an extra statement when the final (Explanatory Notes) are published alongside the Finance Act that where an investor cannot legally claim the Income Tax Relief then the rules preventing a claim to Capital Loss Relief will not apply.

In addition we are considering an update to the technical guidance published by HMRC, and plan to include a similar clarification when the guidance is included within the Savings and Investment Manual."

7 The ATT considers it important to achieve clarity on the entitlement to CGT loss relief where the new income tax provisions afford no relief for an irrecoverable loss.

July 2016

 

Prepared 4th July 2016