We received the following advice from an HMRC officer:
Summary (though we do recommend you read the advice in full)
- The guidance around peer-to-peer lending and how to declare earnings can be found here.
- Zopa does not collect taxes on your behalf and you must declare your earnings to HMRC. If you fill out a self-assessment tax return, you must include your Zopa earnings; if you are not self-assessed, contact HMRC for instructions on how to declare.
- “Refer a friend” bonuses are taxable and should be declared (guidance)
- “Cash back” is typically not considered taxable (guidance)
- Early adopter bonuses are also taxable
- You can’t offset fees for selling loans against income from loan
“This guidance is intended to clarify matters and not to be decisive. Further guidance is available on HMRC website as set out below.
For almost all Zopa lenders, their lending is not a money-lending trade, but an investment activity. They should, therefore, simply return the interest received in each financial year. Lenders will receive interest without tax having been taken off. Clearly, if interest is not received at the return date because of recovery problems or any other reason, the lender should not return it (i.e. they are not required to accrue). If the interest on a loan proves irrecoverable, there has been no amount received so nothing should be returned. From tax year 2015/16, the event that the principal of a loan proves irrecoverable, lenders can offset their losses against their interest income. However, Repayments on defaulted loans should be treated as taxable income (where they were previously eligible for tax relief, for example if the loan defaulted in the 2015/16 tax year or after).
Lenders will need to show the interest they receive in a tax year on their self-assessment returns. Anyone who does not have to fill in a tax return each year should contact their Tax Office and tell them about the interest they are receiving. If they pay tax under Pay As You Earn (PAYE), the Tax Office will normally adjust their tax code to collect the tax that is due on the interest. In some cases, they will have to fill in a tax return and the tax will be collected through their self-assessment.
See HMRC website at http://www.hmrc.gov.uk/manuals/saimmanual/SAIM2400.htm. Lenders may also wish to consult other paragraphs within the Savings and Investment Manual.”