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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Other tax rules on corporate finance: manufactured payments: taxation

Deduction of tax

The rules for deducting tax from manufactured payments are contained in ITA07/PT15/CH9. Further guidance on the rules for manufactured overseas dividends (MODs) is at CFM74360 and CFM74370.

These rules also apply to deemed manufactured payments. See below and CFM46530 for the rules regarding deduction of tax from manufactured payments paid and received by companies in the course of repos.

The requirement to deduct tax from manufactured payments was abolished from 1 January 2014, in respect of any manufactured payment made on or after that date, whenever the underlying payment was made. This change was introduced by section 77 and Schedule 29 FA 2013.

The material in CFM74320 to 74420 applies to manufactured payments made before 1 January 2014. For guidance on payments made on or after 1 January 2014, see CFM74430.

Treating manufactured payments as real dividends or interest

The corporation tax rules for the treatment of manufactured payments paid and received in the course of repos are contained in CTA09/PT6/CH10 and are explained in CFM46260 and CFM46380.

Manufactured interest paid and received by companies is within the loan relationships regime - the rules are explained at CFM46050, with additional guidance on UK securities at CFM74330.

The legislation dealing with manufactured payments in other circumstances is contained in ITA07/PT11/CH2 and CTA10/PT17. It aims to treat the manufactured payment in the hands of the recipient and payer in broadly the same way as if it were a real dividend or real interest, namely:

  • For non-corporates, as an interest receipt or payment if the underlying securities are debt instruments (ITA07/S578 and ITA07/S581) (CFM74340);
  • For both companies and non-corporates, as a UK dividend if the securities are UK shares (ITA07/S573 and CTA10/PT17/CH2) (CFM74350);
  • For both companies and non-corporates, as a foreign dividend where the securities are overseas shares (ITA07/S581 and CTA10/PT17/CH3) (CFM74410).

Excess manufactured payments constituting separate fees

Where a manufactured payment exceeds the gross amount of the dividends or interest that it represents, the amount of the excess is not treated as manufactured dividends or interest (ITA07/S583 and CTA10/S796-S797). The excess is instead treated for all Taxes Act purposes as a separate fee for entering into the contract or other arrangement under which the payment is made. Some tax avoidance schemes have attempted to exploit the fact that these separate fees are not treated as manufactured payments (see CFM74330).

Applying the tax treatment of manufactured payments to deemed manufactured payments

The legislation deems manufactured payments to be made in certain situations.

One of these is explained at CFM74160. However the most common situation in which a manufactured payment is deemed to be made is in the ‘net-paying’ repo. In a net-paying repo the interim holder does not make a manufactured payment to the original owner, and instead receives a smaller amount by way of repurchase price from the original owner.

For companies, net-paying repos are catered for by the accounts-based regime in CTA09/PT6/CH10 (see CFM46320 and CFM46450). For non-corporates, ITA07/S602 means that the dividend manufacturing rules in S572-S591 and ITA07/S918 and S927 apply as if:

  • the relevant person were required under the arrangements for transfer of the securities to pay an amount representative of the real dividend,
  • a payment were made by that person in discharge of that requirement, and
  • the payment were made on the date the repurchase price of the securities becomes due.

The detailed rules as to the tax treatment of manufactured payments apply equally to deemed manufactured payments as to real ones. As with real manufactured payments the tax treatment of the payment will depend on the nature of the underlying securities.