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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: manufactured payments: manufactured interest on UK securities

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.

UK securities and manufactured interest

UK securities means securities issued by the UK government, UK public or local authorities or any UK company or other body resident in the UK, but excluding UK shares. ‘Securities’ includes any loan stock or similar security.

UK securities and manufactured interest: companies

A manufactured payment in respect of interest on a UK security is treated as interest payable on a loan relationship to which the company is party. CTA09/S539 ensures that credits and debits are brought into account in accordance with the loan relationship rules as if the company had paid real interest, either as a trading loan relationship amount if for the purposes of a trade carried on by the company, or as a non-trading loan relationship debit otherwise.

The company will be taxable or relievable on any amounts it accrues in its accounts in accordance with GAAP which relate to the interest on the securities concerned, whether what it actually receives is the real or manufactured interest. If the manufactured interest suffers deduction of tax then the recipient will deal with this in the same way as it would deal with tax deducted from a payment of real interest.

The guidance at CFM46050 applies to manufactured interest on both UK and overseas securities: note that the treatment of manufactured interest paid and received in the course of repos is covered in CFM46260 and CFM46380.

UK securities and manufactured interest: non-corporates

The payment of manufactured interest will be deductible in accordance with normal rules on trading profits (ITTOIA05/PT2) if incurred for the purposes of the non-corporate’s trade. Otherwise, ITA07/S579 provides that the payment is deductible from the net income of the manufacturer, to the extent that it is not otherwise deductible but not if it was made directly or indirectly in consequence of, or in connection with, avoidance arrangements.

The recipient is treated as having received a real interest payment on the securities in question. Where, unusually, the manufactured interest has borne income tax the recipient is treated as having received the payment under deduction of tax. If the manufactured interest plus tax is greater than the gross amount of the real interest, the excess is treated as a fee for entering into the transaction. If it is smaller, then the recipient is nevertheless taxed on an amount equal to the gross amount of the real interest.