Her Majesty’s Revenue & Customs (HMRC) has clarified the knotty issue of deducting income tax at source on interest earned by investors in peer-to-peer (P2P) lenders in a brief published last week.

The ‘many-to-many’ lending model used by P2P lenders has made the application of existing tax rules exceedingly complex, especially as most lenders pool money from investors to meet applicants’ borrowing requirements instead of permitting specific investors to lend to specific borrowers. HMRC believes this complexity leads to inconsistent tax treatment.

Current rules require tax to be deducted from certain payments of yearly interest. A government consultation undertaken last summer specifically addressed the issue of tax deductions from P2P loans, with the aim of amending legislation to clarify how tax obligations will operate in the future.

However, HMRC has for the time being reached the view that the costs to these alternative finance platforms of developing the requisite systems to apply existing rules would be “disproportionate” to the small amount of tax that would be collected.

“Consequently, in the period before the government makes any necessary changes to the legislation, interest payments made on P2P loans may be made without deduction of tax,” states the HRMC policy paper.

In other words, until new legislation is drafted, the interest lenders receive from loans is taxable in the same way as any other interest payment, and individual investors continue to be responsible for notifying HMRC of any income generated through P2P investments and paying the tax due.

Most lenders publish annual statements to make declaring interest easy; some basic-rate taxpayers who do not otherwise complete tax returns simply send these to HMRC with a covering letter