HM Revenue and Customs (HMRC), the UK’s taxation body, is reportedly considering allowing people to invest in peer-to-peer (P2P) lending schemes through a tax-free ISAs.

The Government is keen to encourage P2P groups as a means of propagating SME lending, and also wants to help attract lenders to the schemes by removing complicated tax processes, The Telegraph reported.

If HMRC’s discussions are successful, P2P investments will be allowed to operate in a tax-free ISA, meaning a bigger return for investors while removing the need to fill in tax returns.

David de Koning, head of communications at peer-to-peer lender Funding Circle, said the company had always believed such lending could sit within ISAs, as it does with funding through equity, and it would benefit lenders as it would attract investors who "currently pay tax on investments to help british businesses to access funding… and to grow."

"If there’s a way of making that fairer for lenders it ought to be encouraged."

Richard Carter, chief executive of IT provider Nostrum, described the plans as a "great opportunity" for P2P lenders, which "means that P2P lenders become more accessible to a wider proportion of the public. It means that they can lend more to SMEs as an alternative to asset finance and bank loan providers."

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FCA regulation

The report follows news that the Financial Conduct Authority (FCA) will be regulating the P2P sector from early 2014, introducing measures such as standard credit agreements for borrowers, facility to check creditworthiness, and protection for lenders.

Market leaders Zopa, RateSetter and Funding Circle formed the P2P Finance Association in 2011, which implements minimum standards for capital requirements and processing.

Zopa and RateSetter, which provide personal loans, with almost half used to finance car purchases, run schemes to offset risk using levies from borrowers. Funding Circle, which provides asset finance to small businesses, allows lenders to select borrowers, meaning they take a role in assessing the risk.

De Koning said: "We have been campaigning for formal regulation of the peer-to-peer finance industry for a long time and we’re pleased that the industry will be formally regulated from April 2014. In the absence of a formal regulatory framework we co-founded the Peer-to-Peer Finance Association where we abide by agreed rules and operating principles. We believe these represent a framework for how peer-peer lending can best be formally regulated.

"So far conversations with the Government and Financial Conduct Authority have been encouraging and we look forward to continuing the consultation process with them over the coming months".