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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: manufactured interest

Manufactured interest treated as interest on a loan relationship

Where a company pays or receives manufactured interest (either on UK or overseas securities), CTA09/S540 applies to

  • treat the company as being a party to a loan relationship
  • treat the manufactured interest as interest under a loan relationship (and, in the case of the recipient, as though it were under the loan relationship under which the real interest is payable)

Because the company is treated as being party to a loan relationship, other loan relationship provisions also apply, such as late interest (CFM35800) and the unallowable purposes rules (CFM38100).

Provisions such as CTA10/S812 deem manufactured payments to be made in certain circumstances. Where the deemed payment constitutes interest, it is also brought within the loan relationships provisions by virtue of CTA09/S541(1). However, this does not override the rule in CTA10/S812 disallowing a deduction for deemed manufactured payments. The equivalent rule for income tax purposes is now in ITA07/S596.

Whether receipts and payments of manufactured interest (either real or deemed) are loan relationships credits or debits depends generally on their accounting treatment. See CFM46060 and CFM46070.


LY Ltd borrows loan stock from TW Ltd for 2 months to enable it to settle a short sale. During that period interest of £500 arises on the security. LY Ltd does not receive the real interest because it does not hold the security, but still has to pay manufactured interest of £500 to TW Ltd as compensation for the fact that TW Ltd did not receive the real interest.

If LY Ltd debits the manufactured interest payment of £500 to its profit and loss account in accordance with GAAP, it will be a loan relationship debit. For TW Ltd, the manufactured interest receipt is treated as though it were the real interest on the loan stock that it has lent to LY Ltd.

For repos, the treatment of manufactured interest is dealt with under the issue of income arising on securities during the period of the repo. See CFM46260 and CFM46380.