Section 76: Manufactured Payments: Stock Lending Arrangements
Summary
1.Section 76 amends the Income Tax Act 2007 (ITA 2007) and the Corporation Tax Act 2010 (CTA 2010) to respond to tax avoidance schemes involving stock lending arrangements. These amendments block schemes where part of a manufactured payment is paid in the form of an intra-group loan write-off, or other non-taxable form, to avoid tax charges which would otherwise arise on the manufactured payment.
Details of the Section
2.Subsection (1) amends section 596 of ITA 2007 as per subsections (2) and (3).
3.Subsection (2) substitutes subsection 1 of section 596 with a new subsection 596(1), which provides that section 596 applies if conditions A, B and C are met.
4.New subsections (1A) and (1B) set out conditions A and B which restate the previous conditions set out at section 596(1)(a) and (b) respectively.
5.New subsection (1C) sets out new condition C adds to the circumstances in which section 596 will apply by expanding the condition previously set out in section 596(1)(c). Subsection (1C) sets out the two different sets of circumstances for Condition C. The first is that no provision is made for making payments representative of the dividend or interest to the lender (subsection (1C)(a)). The second circumstance is that provision is made both for making payments representative of the dividend or interest (Section 1C (b)(i)) and another benefit, including the release of any liability to pay an amount (Section 1C (b)(ii)).
6.Subsection (3) replaces subsection (2)(a) from section 596 ITA 2007 with a new subsection 596 (2)(a).
7.New subsection 596(2)(a) sets out the consequences where Condition C is met because the case falls within either 596(1C)(a) or (b).
8.New subsection (2a)(i) provides that in a case falling within paragraph (1C)(a), the rules about manufactured payments apply as if the person who is the borrower under the arrangement were required under the arrangement to pay the lender an amount representative of the dividend or interest.
9.New subsection (2a)(ii) provides that in a case falling within subsection (1C)(b), the rules about manufactured payments apply as if the person who is the borrower under the arrangement were required under the arrangement to pay the lender an amount representative of the dividend or interest. This is after adjusting for any amount paid and falling within subsection (1C)(b)(i).
10.Subsection (4) provides for similar amendments to be made to section 812 CTA 2010 through subsections (5) to (7).
11.Subsection (5) substitutes subsection 1 of section 812 with a new subsection 812(1) which provides that section 812 applies if conditions A to C are met. Conditions A and B restate the previous conditions set out at section 812(1)(a) and (b) respectively.
12.Subsection (1C) provides a new condition C that adds to the circumstances in which section 812 will apply by expanding the condition previously set out in section 812(1)(c). Condition C is met in two different sets of circumstances, which are either that no provision is made for making payments representative of the dividend or interest to the lender (subsection (1C)(a) or that provision is made both for making payments representative of the dividend or interest (subsection 1C(b)(i)) and another benefit, including the release of any liability to pay an amount (subsection 1C(b)(ii)).
13.Subsection (6) replaces subsection (2)(a) from section 812 CTA 2010 with a new subsection 812(2)(a).
14.New subsection 812(2)(a) sets out the consequences where either Condition C (a) or Condition C (b) because the case falls within either section 812(1C)(a) or (b).
15.New subsection (2a)(i) provides that in a case falling within paragraph (1C)(a), the rules about manufactured payments apply as if the person who is the borrower under the arrangement were required under the arrangement to pay the lender an amount representative of the dividend or interest.
16.New subsection (2a)(ii) provides that in a case falling within subsection (1C)(b), the rules about manufactured payments apply as if the person who is the borrower under the arrangement were required under the arrangement to pay the lender an amount representative of the dividend or interest, but after adjusting for any amount paid and falling within subsection (1C)(b)(i).
17.Subsection (8) is a commencement provision. It provides for the amendments made by this section to come into effect on or after 5 December 2012.
Background
18.These changes close a tax avoidance scheme in the area of stocklending arrangements.
19.The scheme attempts to prevent a tax charge arising when a financial trader is involved in stock lending. In those circumstances a manufactured payment made to represent the dividend or interest arising on the securities which have been lent would be taxed as trading income.
20.Section 596 ITA 2007 and section 812 CTA 2010 apply where there is no provision for a manufactured payment to be paid to represent the dividends or interest received on the securities. In those circumstances, section 596 or section 812 apply so that a payment is deemed to be made to the lender, and the stock lender is taxed accordingly. The tax position of the borrower is not affected.
21.The scheme attempts to avoid that charge by arranging for some manufactured payment to be made, but also for part of the payment representing the dividend to be received in a non-taxable form. The new legislation will provide that when any benefit is received representing the dividend, then it will give rise to a charge on the stock lender as though an actual manufactured payment had been received.
