For several years now i have been an investor on MarketInvoice, a peer-to-peer invoice factoring platform. This is the same business as traditional factoring where the investor pays the invoice seller a discounted amount and in return receives the full amount of the invoice when it is paid in the future. I have always filed the income received net of fees as investment income and any losses as capital gains loses on my personal tax return. This is in line with the FAQ on MarketInvoice's website as below
MarketFinance does not currently deduct withholding tax from the net discount fee paid to investors. This
means that investors are responsible for declaring any interest income received as part of their income tax
return, subject to available reliefs and allowances.
Returns on MarketFinance are taxable as interest income in the UK and payable on the net discount fee
received. The net discount fee is the figure you should use when declaring your income tax to HMRC. You do
not need to declare net discount fee that has been accrued but not yet been paid to you.
Investments on MarketFinance are not eligible for income tax relief for irrecoverable peer-to-peer loans
(“bad debts” or crystallised losses), as investments on MarketFinance do not constitute peer-to-peer loan
agreements as defined by Article 36H of the Financial Services and Markets Act 2000. This means that
the majority of individual investors investing on MarketFinance will continue to treat any losses as capital
losses, which they are not able to deduct against the income subject to income tax (see above).
I have recently been in discussion with HMRC over an unrelated matter. On the tax return in question I had put down a capital loss resulting from several trades failing to pay back. When I explained to the inspector he concluded that this type of investment was actually a trading business and should be shown as self employed income NOT interest and CGT loss. I am not entirely sure what his logic was for this. He was unaware that all private investors on the MF platform will be declaring their income as interest. If he is correct not only woudl i be paying income tax, but also presumably be liable to NI on the self employed income?
Can anyone clarify who is correct? If HMRC are wrong can you give me a clear arguement to go back to him with to clear up the issue?
Grateful for any advice