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HMRC internal manual

International Manual

DT applications and claims: manufactured payments

Manufactured UK interest

Manufactured interest is any payment made as part of a transfer of ownership of a UK security which is representative of interest on that security. Circumstances in which this might happen include

  • A loan of UK securities is outstanding over an interest payment date. The security lender does not receive the real interest payment to which he would have been entitled had the security not been lent.
  • A contract to buy a security might be on terms that include the right to an interest payment (cum-dividend) but the transfer is settled on what is called ‘short’ terms. That means that the seller retains the right to the next interest (ex-dividend).

In each case the seller will receive an additional ‘manufactured’ amount of interest.

A sale and repurchase transaction (a repo) might also result in a situation where an additional amount that is representative of the original interest is due to the seller of the stock. The seller will receive an additional ‘manufactured’ amount.

Current UK legislation does not require UK tax to be deducted from many categories of interest that is paid from UK sources (ICTA88/S349). If the original amount of interest would have been paid without deduction of UK tax, any manufactured amount that is representative of interest is similarly paid without deduction of UK tax.

Where the recipient of any manufactured payment of interest is resident in a country with which the UK has a DTA that provides for relief from UK tax on interest payments; it may be possible for the beneficial owner to make a claim to CAR Residency for repayment of the tax that is deducted from a manufactured interest payment. See INTM342000.

It is possible for manufactured payments to be used as a method of avoiding UK tax. LBS Financial London wishes to see all such claims before they are paid. Please refer all claims for repayment of tax on manufactured UK interest to Technical Advice Group before you take any other action.