CRYPTO61412 – Decentralized Finance: Lending and Staking: Corporation Tax: Making a DeFi Loan: Tax Provisions – HMRC Internal Handbook

HMRC does not consider the return (see CRYPTO61130) earned by the lender/cash provider as ‘interest’ for tax purposes (see CRYPTO61110). Accordingly, any provision of the Tax Laws that applies to interest will not apply to the return. Additionally, HMRC does not expect the lending/staking of tokens by a client subject to corporation tax to be a lending relationship (see CRYPTO41100). How the return is taxed will depend on whether the receipt is in the nature of capital or income. For guidance on determining the nature of the return, see CRYPTO61414 and CRYPTO61214.

capital receipt

If the return is in the nature of capital, then the return will be chargeable to corporation tax as a taxable gain, see CRYPTO61620.

Revenue Receipt

If the lender/liquidity provider is not engaged in a business activity involving the provision of decentralized finance (DeFi) loans and the receipt is in the nature of income, it will fall within the scope of the provisions on miscellaneous income (part 10 CTA 2009).

Sections 979-981 CTA 2009 (known as the “Sweeping Provisions”) charge corporation tax on income that is not otherwise chargeable as income under the corporation tax laws. companies. For guidance on miscellaneous revenue sweeping provisions in general, see BIM100000.

Many cases have dealt with the scope of miscellaneous income collection provisions. Generally, the result is that the award will be chargeable under miscellaneous income set-off provisions if it is in the nature of income and results from an agreement between the two parties that the recipient will compensate the provider for its services. , for example, if there is a misunderstanding. Never mind that a formal written contract does not exist. For more information on the relevance of contracts and agreements, see BIM100105.

When a lending liquidity provider lends/raises tokens to a borrower/DeFi lending platform, there will be an agreement between the borrower/DeFi lending platform and the lender/liquidity provider. This agreement, which may not be considered a binding contract, will set out the terms of the loan, including:

• the duration of the loan, which can be fixed or indefinite,
• the principal of the loan,
• any returns payable by the borrower/DeFi lending platform to the lender/liquidity provider

It does not matter if the amount to be paid is unknown (for example, if the rate of return fluctuates or if the borrowing/staking period is indefinite), only that there is a payment obligation for the borrower/platform of DeFi loan.

Consequently, if the declaration has the nature of income, the declaration will be chargeable to corporation tax under the provisions relating to the sweeping of miscellaneous income.