Section 77, Schedule 29: Manufactured Payments: General
Summary
1.Section 77 introduces Schedule 29 which simplifies the tax treatment of manufactured dividends for corporation tax purposes, and of all manufactured payments for Income Tax purposes, and repeals the detailed rules setting out the current tax treatment of manufactured dividends and repos in Part 17 of the Corporation Tax Act 2010 (CTA 2010) and of manufactured payments and repos in Chapters 1-3 of Part 11 of the Income Tax Act 2007 (ITA 2007).
Details of the Schedule
2.Paragraph (1) introduces a new Part 11ZA into ITA 2007, comprising sections 614ZA to 614ZD.
3.Section 614ZA explains that Part 11ZA deals with the application of the Income Tax Acts to manufactured payment relationships and payments which represent dividends or interest.
4.Section 614ZB defines the terms “manufactured payment relationship”, “manufactured payment” and “securities”.
5.Subsection (1) provides that for the purposes of the Income Tax Acts a person has a manufactured payment relationship if conditions A to C are met.
6.Subsection (2) gives Condition A. It provides that Condition A is that under any arrangements an amount is payable by or to a person, or any other benefit is given by or to the person, including the release from a liability to pay an amount.
7.Subsection (3) sets out Condition B. Condition B is that the arrangements relate to the transfer of securities.
8.Subsection (4) sets out Condition C, which is that the amount or value of the other benefit referred to in Condition A is, or will be treated as, representative of a dividend or interest on the securities.
9.Subsection (5) provides that in subsection (2), the reference to an amount being payable or other benefit being given by the person includes a reference to an amount being payable, or other benefit being given by another person on behalf of that person.
10.Subsection (6) defines “manufactured payment” for the new Part 11ZA, as an amount, or the value of a benefit, within subsection (2). It also defines securities for the purposes of that part, providing that “securities” means shares in a company and loan stock or any similar security.
11.Section 614ZC sets out the tax treatment of the payer of a manufactured payment.
12.Subsection (1) explains that section 614ZC applies where a person has a manufactured payment relationship under which a manufactured payment is paid by or on behalf of the person.
13.Subsection (2) provides that no income deduction is allowed in respect of the manufactured payment, subject to subsection(3).
14.Subsection (3) provides that subsection (2) does not apply in relation to a company so far as the manufactured payment is brought into account in calculating the profits of a trade carried on by the person.
15.Section 614ZD sets out the treatment of the recipient of a manufactured payment.
16.Subsection (1) provides that subsection (2) applies if a person has a manufactured payment relationship under which a manufactured payment is payable to that person.
17.Subsections (2) and (3) provide that for the purposes of the charge to income tax on the income of that person, the Income Tax Acts apply to the person as if the manufactured payment were a dividend or interest on the securities, subject to subsections (4) to (7).
18.Subsection (4) provides that subsection(2) does not apply to the person mentioned in that section as far as the manufactured payment is brought into account in calculating the profits of a trade carried on by that person.
19.Subsection (5) provides that subsection (2) does not apply in relation to the person mentioned in that section for the purposes of double taxation relief (DTR) in respect of any dividend or interest.
20.Subsection (6) provides that where the manufactured payment is treated as a dividend under subsection(2), the person mentioned in that subsection is not entitled to a tax credit under Chapter 3 of Part 4 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), in respect of the dividend.
21.Subsection (7) defines double taxation relief, for the purposes of the section as any relief given under or as a result of Part 2 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).
22.Paragraph [2] introduces a new Part 17A into CTA 2010, comprising sections 814A to 814D.
23.Section 814A gives an overview of Part 17A, explaining that it deals with the application of the Corporation Tax Acts to manufactured dividend relationships and payments which represent dividends.
24.Section 814B defines “manufactured dividend relationship”, “manufactured dividend” and “the real dividend”. The definitions are modelled on the manufactured interest provisions in Chapter 9 of Part 6 of the Corporation Tax Act 2009 (CTA 2009).
25.Subsection (1) provides that a company has a manufactured dividend relationship if conditions A to C are met. Those conditions are as follows:
26.Subsection (2) gives Condition A. Condition A is that arrangements are in place which provide that an amount is payable by or to a company, or any other benefit is given by or to the company. A benefit can include the release from any liability to pay an amount.
27.Subsection (3) sets out Condition B. Condition B is that the arrangements relate to the transfer of shares in a company
28.Subsection (4) sets out condition C, which is that the amount, or the value of the other benefit referred to in Condition A is, or will be treated as, representative of a dividend on the shares.
29.Subsection (5) provides that the reference to an amount being payable or other benefits being given by the company includes a reference to the amount or benefit being given by another person on behalf of the company.
30.Subsection (6) provides further definitions for Part 17A. A “manufactured dividend” means an amount, or the value of a benefit, within subsection (2), and “the real dividend” means the dividend mentioned in subsection (4)(a).
31.Section 814C sets out the treatment for tax purposes of the payer of a manufactured dividend.
32.Subsection (1) provides that the section applies where a company has a manufactured dividend relationship under which a manufactured dividend is paid by or on behalf of the company.
33.Subsection (2) provides that no income deduction is allowed in respect of the manufactured dividend. This is subject to subsections (3) to (5).
34.Subsection (3) provides that subsection (2) does not apply in relation to a company as far as the manufactured dividend is brought into account in calculating the profits of a trade carried on by the company. In these circumstances a deduction may be available subject to satisfying the normal requirements.
35.Subsection (4) provides that subsection (5) applies if the manufactured dividend relates to investment business of the company and the company received the real dividend in the accounting period and the real dividend is taxed by virtue of section 548(5) CTA 2010 (recipients of distributions from REITs).
36.Subsection (5) provides that in these circumstances, the manufactured dividend is to be treated as expenses of management of the company’s investment business for the accounting period.
37.Subsection (6) provides that subsection (7) applies if the manufactured dividend is referable to basic life assurance and general annuity business of the company, the company received the real dividend in the accounting period and the real dividend is taxed by virtue of section 548(5) CTA 2010 (recipients of distributions from REITs).
38.Subsection (7) provides that in these circumstances, the manufactured dividend is to be treated as a deemed BLAGAB management expense of the company for the accounting period.
39.Subsection (9) provides that references in section 814C(4) and (6) to a real dividend include references to a manufactured dividend which is treated as a real dividend as a result of the application of section 814D(2). This means that where a company receives a manufactured dividend, and pays a manufactured dividend representative of that manufactured dividend, it may qualify as an expense of management, or a BLAGAB management expense provided the other conditions of section 814C(4) or (6) respectively apply.
40.Subsection (10) defines what is meant by “referable to BLAGAB” business.
41.Section 814D provides for the tax treatment of the recipient of a manufactured dividend.
42.Subsection (1) provides that subsection (2) applies if a company has a manufactured dividend relationship under which a manufactured dividend is payable to it.
43.Subsections (2) and (3) provide that for corporation tax purposes, the manufactured dividend is treated as a dividend on the shares, subject to subsections (4) to (8).
44.Subsection (4) provides that subsection (2) does not apply to a company as far as the manufactured dividend is brought into account as profits of a trade carried on by the company.
45.Subsection (5) provides that subsection (2) does not apply in relation to a company for the purposes of double taxation relief, defined in subsection (9) as any relief given under or as a result of Part 2 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).
46.Subsection (6) provides that part 9A of CTA 2009 (which deals with company distributions) has effect with the modification given in subsection (7).
47.Section (7) sets out the modification, which is that references in part 9A to the payer are to be treated as references to the company that pays the real dividend, and that the definition of the payer in section 931T of CTA 2009 is treated as omitted.
48.Subsection (8) provides that the company to which the manufactured dividend is payable is not entitled to a tax credit under section 1109 of CTA 2010 in respect of that manufactured dividend.
49.Subsection (10) gives section 814D priority over other legislation, so that it has effect regardless of section 358 of CTA 2009, or any other provisions of Part 5 of CTA 2009 which would otherwise prevent a loan relationships credit from being brought into account.
50.Paragraph 3 introduces various consequential and other amendments.
51.Paragraph 4 provides that the Taxation of Chargeable Gains Act 1992 (TCGA 1992) is to be amended.
52.Paragraph 5 replaces section 263B(7) TCGA 1992 with new text defining securities for the purposes of section 263B, replacing references to the same definitions in Part 17 of CTA 2010, which has been repealed.
53.Paragraph 6 repeals section 263D TCGA 1992, which concerns gains accruing to persons paying manufactured dividends.
54.Paragraphs 7, 8 and 9 make consequential changes to TCGA 1992 to reflect the repeal of section 263D.
55.Paragraph 10 amends the regulation making power in Section 263I, introducing definitions of manufactured overseas dividend, overseas securities, overseas dividend and securities, as these definitions are being repealed from ITA 2007.
56.Paragraph 11 amends the Finance Act 2004 to reflect the repeal of section 263D.
57.Paragraph 12 provides for amendments to ITTOIA 2005.
58.Paragraphs 13 and 14 amend sections 397(6) and 397A of ITTOIA 2005 to reflect the replacement of section 592 ITA 2007 with the similar provision in section 614ZD(6).
59.Paragraph 15 omits section 397B of ITTOIA 2005. That section refers to the treatment of manufacture overseas dividends from which tax has been deducted under section 581 ITA 2007. As that section, and the requirement to deduct tax, are being repealed, s397B will become redundant.
60.Paragraph 16 provides for amendments to ITA 2007.
61.Paragraph 17 amends section 2 of ITA 2007 (overview of Act) to reflect the repeal of Part 11, and the introduction of Part 11A.
62.Paragraph 18 provides for Chapters 1 to 3 of Part 11 (manufactured payments and repos) to be repealed, apart from section 596(5) which will be repealed separately, and makes a consequential change to section 606. The provisions of those chapters are either being replaced by sections 614ZA to 614 ZD or being repealed, in line with the new simplified regime.
63.Paragraph 19 amends section 647 ITA 2007. It introduces definitions of manufactured payments contract, overseas securities, overseas dividend and UK securities. This is necessary because section 647 currently refers to the definitions in section 578 and 581, which are being repealed.
64.Paragraph 20 amends section 658 ITA 2007, which supplements the regulation making powers in sections 656 and 657. Paragraph 19 introduces definitions of UK shares, UK securities and overseas securities into section 658. This is necessary because section 658 currently refers to the definitions in section 566 and 567, which are being repealed.
65.Paragraph 21 amends section 918(1) ITA 2007, which refers to manufactured dividends on shares in Real Estate Investment Trusts (REITs). It replaces a reference to section 573(1), which is being repealed, with a reference to section 614ZC(1).
66.Paragraph 22 amends section 919 ITA 2007, which concerns manufactured interest on UK securities. It replaces subsection (1), which refers to section 578(1) which is being repealed, with a similar subsection referring to section 614ZC(1).
67.Paragraph 23 repeals section 920 ITA 2007. That section contains the reverse charge provision, which imposes a requirement to deduct tax on a UK recipient of manufactured interest. That reverse charge requirement will no longer apply.
68.Paragraph 24 amends section 921 ITA 2007. That section applies to cases where interest is paid gross on underlying securities, and provides that section 919(2) does not require any deduction of a sum representing income tax on the payment of the manufactured interest.
69.Paragraph 25 repeals sections 922 to 925 ITA 2007. Those sections impose the requirement to deduct tax from manufactured overseas dividends, and the reverse charge. Those requirements will no longer apply.
70.Paragraph 26 makes consequential amendments to section 925A(2) ITA 2007.
71.Paragraph 27 makes a consequential repeal of section 925B ITA 2007. That section refers to the consequences of the reverse charge provisions, which are being repealed.
72.Paragraph 28 makes consequential changes to section 925C ITA 2007.
73.Paragraph 29 repeals subsections (1) and (1A) of section 926 ITA 2007, since those interpretation provisions apply to sections which are being repealed.
74.Paragraphs 30, 31 and 32 make various minor and consequential amendments to ITA 2007 following the repeal of Chapters 1-3 and sections 922-925.
75.Paragraph 33 provides for the Finance Act 2008 (FA 2008) to be amended, and makes consequential changes to Schedule 12 and Schedule 23 to reflect the repeals of Chapters 1-3 and sections 922 -925 of ITA 2007 and section 263D TCGA 1992.
76.Paragraph 34 provides for amendments to CTA 2009.
77.Paragraph 35 amends section 539 CTA 2009. It repeals section 539(7) which refers to interest deemed to be paid under section 812(2) CTA 2010 as that section is being repealed following the introduction of section 814B CTA 2010.
78.Paragraph 36 amends section 540(3) CTA 2009, deleting a reference to section 799 CTA 2010, which is being repealed.
79.Paragraph 37 amends section 550 CTA 2009. It deletes section 550(6) which refers to double taxation relief in respect of a manufactured overseas dividend, which will no longer be available, and inserts new subsections 550(5B – 5D) which provide that a borrower will not be entitled to double taxation relief as a result of section 550(3) unless actual overseas tax has been deducted from the manufactured payment.
80.Paragraph 38 amends section 1221(1) CTA 2009, which refers to amounts treated as expenses of management. It deletes section 1221(1)(i) and replaces the reference in that section to section 791(4) 2010, which is being repealed, with a reference to section 814C(5) 2010.
81.Paragraph 39 amends section 1248 CTA 2009. It repeals two references to section 799 CTA 2010, which is being repealed.
82.Paragraph 40 provides for amendments to the Finance Act 2009 (FA 2009), repealing paragraphs (4) and 13(b) which refer to provisions in ITTOIA 2005 and ITA 2007 which are being repealed.
83.Paragraph 41 provides for amendments to CTA 2010.
84.Paragraph 42 amends section 1 of CTA 2010, to reflect the repeal of Part 17 and introduction of Part 17A.
85.Paragraph 43 repeals Part 17 of CTA 2010. That Part contains provisions which apply to manufactured payments, stock lending, and repos, which are being replaced by sections 814A to 814D of CTA 2010, or which will no longer be required.
86.Paragraph 44 amends section 1109 (5) of CTA 2010. It inserts a reference to section 814D which provides that no tax credit is available for recipients of manufactured dividends, and repeals references in section 1109(5)(a) to legislation which is now repealed.
87.Paragraph 45 makes various repeals of paragraphs in Schedule 1 which refer to repealed legislation.
88.Paragraph 46 repeals a reference in Schedule 2 which refers to Part 17 of CTA 2010 as that Part is repealed.
89.Paragraph 47 makes consequential repeals from defined expressions in Schedule 4 CTA 2010.
90.Paragraph 48(1) provides for amendments to TIOPA 2010.
91.Paragraph 48(2) repeals section 85A(4)(b) which refers to sections 792 and 794 of CTA 2010, which are repealed.
92.Paragraph 48(3) and (4) repeal paragraph 113 from Schedule 7 and paragraph 82 from Schedule 8, both of which refer to repealed legislation.
93.Paragraph 49 amends Finance Act 2011. It repeals paragraphs 22 and 24 in Schedule 13, which refer to repealed legislation.
94.Paragraph 50 provides for amendments to Finance Act 2012. It repeals section 22, and paragraphs 220 to 223 of Schedule 16, all of which refer to repealed legislation, and amends the final line of section 78(3) to refer to section 814C in place of references to repealed legislation.
95.The provisions of Part 1 of this Schedule, which apply for income tax, and those of Part 2, which apply for corporation tax, will apply in respect of manufactured payments made on or after 1 January 2014. The provisions of Part 3, which are mainly repeals and consequential amendments, will apply from 1 January 2014.
Background
96.The legislation applying to manufactured payments is complex, and has been the subject of a number of avoidance schemes.
97.A consultation was carried out in 2012 which set out proposals for reforming and simplifying the legislation. Responses to the consultation document were supportive.
98.Legislation is therefore now being introduced to simplify the tax treatment of manufactured payments.
99.For corporation tax purposes, the current treatment of manufactured interest is not changed.
100.Manufactured dividends will be treated in two possible ways. When they are received by a financial trader, they will be taxed as trade receipts, and when paid by a financial trader they will generally be allowed as a trade deduction.
101.Generally, no specific provisions will be required to bring about this effect, and following the accounts prepared in accordance with GAAP will bring about this effect.
102.In other circumstances, the receipt of a manufactured dividend will not be taxable and the payment of a manufactured dividend will not be allowable as a deduction.
103.The current rules requiring tax to be deducted when a manufactured overseas dividend (MOD) is paid will be repealed. The reverse charge (under which a UK company receiving a MOD from which tax had not been deducted had to deduct tax and pay it to HMRC) has also been repealed.
