Other tax rules on corporate finance: manufactured payments: introduction
Overview of manufactured payments
This guidance applies to manufactured payments made before 1 January 2014, when the tax rules were simplified. For manufactured payments made on or after 1 January 2014, see CFM74430.
Manufactured payments are, broadly, payments representative of UK dividends, interest or overseas dividends paid under contracts or other arrangements for the transfer of securities.
Manufactured payments normally arise under repos (CFM46000) or stock loans (CFM74100) where the transaction crosses an interest or dividend date. For example, where a loan of overseas securities is outstanding over the dividend date, the lender does not receive the real dividend to which he would have been entitled had he not lent the securities. The borrower therefore makes a payment - a manufactured payment - to the lender as compensation for not receiving the real dividend.
‘Manufactured payments’ also occur where a dealer sells securities ‘cum div’ (with dividend) but delivers securities that are ‘ex div’ (without dividend). The sum that the dealer pays to the buyer to compensate him for not receiving the real dividend is a manufactured payment. The sales that give rise to such payments are often ‘short’ sales (CFM74100): as the dealer does not own the securities at the time of selling them, he is required to acquire them between the date of the bargain and the delivery date, and may only be able to acquire ‘ex div’ stock.
Who makes manufactured payments?
Most manufactured payments will be made by financial traders such as banks and stock exchange members. However, other persons may also make them. HMRC staff should generally enquire, seeking an explanation, in any case where tax computations include deductions for manufactured payments that are not reflected in the accounts.
In order to supervise the tax treatment of manufactured payments, the books and records of any person engaging in transactions in securities are subject to inspection by officers of HMRC under the powers granted by TMA70/S21. HMRC staff should refer to CT and VAT Financial Products Team on the use of these powers.
What is ‘manufacture’?
The legislation dealing with manufactured payments is found in ITA07/PT11/CH2 and ITA09/PT15/CH9 for income tax and CTA10/PT17 for corporation tax. A manufactured payment is one that arises under a contract or other arrangement for the transfer of securities requiring one of the parties (the ‘dividend manufacturer’) to pay to the other (‘the recipient’) an amount representative of a dividend on the securities.
Where the recipient of a dividend simply passes on the dividend to which it is not entitled, this does not amount to dividend manufacture. For example, a person may make a ‘cum div’ sale out of his existing shareholding (a `long’ position), and receive the dividend merely because the company register has not been updated to reflect the change of ownership. The passing on of this dividend to the purchaser is not dividend manufacture. See CIR v Roberts 13TC277 and CIR v Oakley 9TC582.