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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Other tax rules on corporate finance: manufactured payments: payments made on or after 1 January 2014: taxation

Taxation

This guidance applies to manufactured payments made on or after 1 January 2014. For manufactured payments made before 1 January 2014, see CFM74300.

Tax treatment of manufactured payments

Manufactured interest paid and received by companies is within the loan relationships regime - the rules are explained at CFM46050 

The legislation dealing with manufactured payments in other circumstances is contained in ITA07/PT11ZA and CTA10/PT17A. It aims to treat the manufactured payment in the hands of the recipient in broadly the same way as if it were a real dividend or real interest, namely:

  • for non-corporates, as an interest receipt if the underlying securities are debt instruments (ITA07/S614ZD) (CFM74340);
  • for both companies and non-corporates, as a dividend if the underlying securities are shares (ITA07/S614ZD and CTA10/S814C and S814D) (CFM74350);

For companies a manufactured dividend paid will only be allowable if incurred as part of a trade or if it relates to a taxable distribution received from a REIT. For non-corporates a manufactured payment made will only be allowable if incurred as part of a trade.

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 dividends

Companies

Except in the circumstances set out below, the general rules in CTA10/S814C(2) and CTA10/S814D(2) apply to manufactured dividends paid and received by companies. No deduction is given for manufactured dividends paid in calculating the company’s income. Manufactured dividends are treated as dividends on the shares and may therefore be subject to the dividend exemption rules in Part 9A of CTA09.

Manufactured dividends and traders

Where manufactured dividends are paid or received by a company in the course of a trade, payments or receipts of manufactured dividends are allowable (s814C(3)) or taxable (s814D(4)) in calculating the profits of the trade, provided that they are taxable or deductible under the general principles applying to the taxation of trades (CTA10/S814C(8)).

Manufactured dividends and distributions from Real Estate Investment Trusts (REITs).

CTA10/S814C(4) and (5) provide that if a company has an investment business, and receives a distribution from a REIT which is taxed under s548(5) CTA 09, then a manufactured dividend paid which is in respect of that distribution can be treated as an expense of management of the company’s investment business.

CTA10/S814C(6), (7) and (10) apply if a company receives a distribution from a REIT which is referable to basic life assurance and general annuity business (BLAGAB) and is taxed under CTA09/S548(5). A manufactured dividend paid which is in respect of that distribution can be treated a deemed BLAGAB management expense under FA12/S76.

These provisions will also apply if a company receives a manufactured dividend which is treated as a distribution from a REIT (CTA10/S814C(9)).

Manufactured payments: non corporates

The legislation covering manufactured payments under the income tax regime is in Part 11ZA of ITA 2007.

Payments made

No deduction is allowed for any manufactured payment made by a person in calculating any profits or other income of the person (ITA07/S614ZC(2)).

There is an exception if the manufactured payment is an allowable deduction under normal trading principles in calculating the profits of a trade carried on by the person (ITA07/S614ZC(3)).

Payments received

A person is taxed on a manufactured payment received as if the real dividend or interest has been received (ITA07/S614ZD(2)). However the person will not be entitled to any tax credit or double taxation relief which may have been due on a real dividend (ITA07/S614ZD(5) and (6)).

This does not apply where a payment is received in the course of a trade carried on by the person (ITA07/S614ZD(4)), in which case the payment will be taxed as a trade receipt under normal trading principles.