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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Other tax rules on corporate finance: stock loans: anti-avoidance: return to lender in non-taxable form

Anti-avoidance provisions for when the return is paid to the lender in a non-taxable form.

Stock loans enable dividend or interest income to be switched from the lender, who would otherwise receive it, to the borrower. An obvious opportunity for avoidance is to put a security in someone’s hands over a dividend date and to avoid the manufactured payments legislation (CFM74300) by ensuring the return is made to the lender in a different non-taxable form. ICTA88/S736B was enacted to prevent this by deeming a manufactured payment to be made to the lender where none is made in reality. For income tax purposes for 2007-08 and later tax years ICTA/S736B is re-written as ITA07/S596. For corporation tax purposes ICTA88/S736B is re-written toCTA10/S812 for accounting periods ending on or after 1 April 2010.

It provides that where:

  • dividend or interest income is received by someone other than the lender of the security as a consequence of the stock lending arrangement, and
  • there is no provision for securing that the lender receives payments representative of the dividend or interest,

then for the purposes of the manufactured payments legislation the borrower is deemed to have paid a manufactured payment to the lender on the date when the real dividend or interest was paid.

The result is that the lender of the securities is still treated as receiving the interest or dividend that it would have received if the stock loan had not taken place. The borrower is not entitled to any deduction for the deemed manufactured payment in computing its profits or total income.

Finance Bill 2013

An amendment was made in Finance Bill 2013 to clarify the legislation. The clarification was in response to avoidance schemes where a MOD was paid representing only part of the real dividend.

The remaining value of the dividend was, in effect, transferred to the lender in some other, non-taxable form.

It was asserted that the provisions of section 812 did not apply since some provision had been made for making a payment representative of the dividend, so that the wording of subsection (1)(c) is not met.

For example, a company lends shares to an overseas company in the same group. While the shares are out on loan, a dividend is paid on the shares. The overseas company pays a manufactured overseas dividend representing part of the dividend, but pays the remainder by writing off an intercompany balance. The write-off is said to be exempt from tax under CTA09/S358. While the avoidance schemes are not effective, the legislation was amended in any case to provide clarity.

A new subsection 812(2)(1C) added condition C to section 812. That condition provides that section 812 will apply where provision is made for making payments representative of the dividend or interest, and also for another benefit, including, but not restricted to, the release of any liability to pay any amount.

The new condition applies in respect of any payments made, or treated as paid, on or after 5 December 2012.