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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: manufactured interest: DCC Holdings

DCC Holdings case

In a ‘net-paying’ repo, the transaction crosses a coupon or dividend date and the purchaser does not pass on any income it receives by means of a manufactured payment. Instead the repurchase price is reduced to reflect the fact that the seller has, in effect, repaid part of the loan. The purchaser in a net-paying repo is deemed to make a manufactured payment: manufactured interest where the securities are loan relationships.

In a transaction predating the FA 2007 rules (see CFM46200), DCC Holdings purchased and resold gilts in a number of net-paying repos in which it received gilt interest of £28.8m. It made an economic profit of £1.8m (the ‘interest’ under the repo), but claimed that the transactions resulted in a loan relationships debit of £27m, on the basis that the gilt interest received was not taxable and that it was entitled to a ‘freestanding’ deduction for full amount of the deemed manufactured interest payment.

The Supreme Court found in HMRC’s favour in December 2010 ([2010] UKSC 58). There was no freestanding deduction for the deemed payment of manufactured interest; instead there must be symmetry between the credit for the interest received and the debit for the manufactured interest deemed to be paid. Both should be £2.9m, the amount of the coupon that accrued during the period of the repo. As a consequence, DCC was taxed on its economic profit of £1.8m.