Tax Statements - cannot reconcile

Sorry I haven't looked at mine yet I do all my tax returns wih my ouija board for greater accuracy than one could expect from Frisky Cats

I learnt something new today. Hope this thread is a suitable place for it.

I sent this to Fairly Complicated this morning:
When I sell, say, a £20 loan part five days before its repayment date, I get the accrued interest paid to me by the buyer. For an E loan this interest might be 25p. This 25p shows in the transaction report as interest. Is that 25p included by FC in my tax statement as 25p of income?

Five days later, the borrower makes the repayment to the buyer (the buyer of my £20 part). The buyer’s transaction record will show 30p of interest. Will that 30p be included in that buyer’s FC tax statement? If so, won’t tax be paid twice (once by me and once by the buyer) on 25p of that 30p?

Same day reply from Friendly Comrade (Many thanks, Jack):
“With regards to what gets included on the tax statement, whilst in your example the 25p received by the seller is added on the the seller's statement, at the same time 25p is deducted from the buyer's tax statement. Therefore when the borrower makes the 30p of interest repayment at the end of the month, only 5p will be added net to the buyer's tax statement.”

The key thing from a taxation point of view is that accrued interest is taxable. So FC are correct to include the accrued interest that the seller has realised upon selling. The buyer will have a negative accrual for the interest portion of the loan part that they bought. So in the example you give, although the 30p interest they receive when the borrower pays their monthly installment will be taxed, this is offset by the negative accrual of 20p interest when they bought the loan part - resulting in 10p of interest being taxable.

That is disputed by a discussion a while back on Ablrate where people (not me) seemed qualified to discuss interest and income tax. I thought that only payments actually made were taxable. I do not think that your FC tax statement for the fiscal year includes the accrued interest outstanding on 5th April and excludes the accrued interest on previous 5th April. Or does it. The point at issue is that the payment of a sum of money by one lender to another in consideration of an entitlement to accrued interest on a loan is not actually a payment of interest and not taxable (strictly). I believe that the tax statement assumes such payments are taxable, and of course that is fairer. Please correct this if you think it wrong and have some reason to say so. Always happy to be corrected and learn.
Edit: missed ablender's post - where on FS please?

There are very few instances where accrued interest is taxed as income, specifically only interest captured by the Accrued Interest Scheme.  The Accrued Interest Scheme applies to debt securities, eg bonds, loan notes (ie tradable loan instruments - I don't think FC parts apply) and deems loans that have been sold/acquired to consist of the clean value plus accrued interest with the two elements being used to subsequent chargeable capital and chargeable interest. The scheme was originally set-up to address this specific issue and to tackle manipulation of capital and income.  Useful guidance can be found: (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323803/hs343.pdf).  The only thing I'm slightly uncertain of is whether FC loan parts would be captured as debt securities - probably not as the term securities usually refer to instruments tradable on a public market (and FC's market is not public and restricted to members).

Thanks ablender. May I quote from the representative of Funding Secure

'When selling a loan on the secondary market - the amount you receive for the loan is a pure sale and is therefore not taxable. Although the amount includes the nominal accrued interest - this is not "interest earned" and therefore is not listed on the earned tax report.'
This is selling the right to interest accrued without incurring an income tax liability. You should therefore sell at a discount equal to the notional tax saving, other things being equal.

Taxation 101 does not appear in my qualification list, and so I will exit by repeating that I understood that FC did it the fair way (for autosales and autopurchases at par), but perhaps their tax statement does not give exactly what you need to be 100% compliant as a personal income tax payer. I doubt that HMRC will worry too much about exactly who pays each penny of tax on interest as long as they are getting the correct amount in total. Innovative finance seems to have a taxation tail wind. The fees treatment (or blind eye) in past years for example.

I would like to understand both the theory and the practice, and so those who are qualified, please continue.

Yes, it was the Accrued Interest Scheme I was referring to, which states that Under the AIS, the interest which has accrued up to the date of sale is assessed to income tax on the vendor (whose sale price will have been increased to take account of it), and the purchaser is given relief for the same amount normally against the next payment of interest. 

So if FC loans would not fall under the definition of transferable securities by the definition in AIS then it would be interesting to see how a realised gain (ie. The portion of the sale that is accrued interest) should be fairly taxed.