Income and Corporation Taxes Act 1988

3 (1) This paragraph applies (subject to paragraph 3A below) in any case where, under a contract or other arrangements for the transfer of United Kingdom securities, one of the parties (an “interest manufacturer”) is required to pay to the other (“the recipient”) an amount (“the manufactured interest”) which is representative of a periodical payment of interest on the securities.

(2) For the relevant purposes of the Tax Acts, in their application in relation to the interest manufacturer—

(a) the manufactured interest shall be treated, except in determining whether it is deductible, as if it—

(i) were an annual payment to the recipient, but

(ii) were neither yearly interest nor an amount payable wholly out of profits or gains brought into charge for income tax;

(b) the gross amount of that deemed annual payment shall be taken—

(i) to be equal to the gross amount of the interest of which the manufactured interest is representative; and

(ii) to constitute income of the recipient falling within section 1A;

and

(c) an amount equal to so much of the gross amount of the manufactured interest as is not otherwise deductible shall be allowable as a deduction against the total income or, as the case may be, total profits of the interest manufacturer [F1 , but only to the extent that—

(i) it would be so allowable if it were interest, or

(ii) so far as not falling within sub-paragraph (i) above, it falls within sub-paragraph (2A) below].

[F2 (2A) An amount of manufactured interest falls within this sub-paragraph if and to the extent that the interest manufacturer—

(a) receives the periodical payment of interest on the securities which is represented by the manufactured interest, or receives a payment which is representative of that periodical payment of interest, and is chargeable to income tax [F3 (and see section 714(5) for the amount so chargeable in a case where section 714(4) applies)] on the periodical payment or representative payment so received;

[F4 (b) is, by virtue of section 714(2), chargeable to income tax on [F5 income] in respect of transfers of securities which are subject to the arrangement giving rise to the payment of manufactured interest; or]

(c) is treated under section 730A (repos) as receiving a payment of interest in respect of the securities and is chargeable to income tax on that payment.

(2B) Where an amount is allowable under sub-paragraph (2)(c) above by reference to the whole or any part of—

(a) a periodical payment of interest, or a payment representative of such a payment, falling within paragraph (a) of sub-paragraph (2A) above,

(b) a sum falling within paragraph (b) of that sub-paragraph, or

(c) a payment of interest which a person is treated as receiving, as mentioned in paragraph (c) of that sub-paragraph,

(the “utilised portion” of the interest, sum or other payment) no other amount shall be allowable under sub-paragraph (2)(c) above by reference to all or any of the utilised portion of the interest, sum or other payment.]

(3) For the relevant purposes of the Tax Acts, in their application in relation to the recipient and any persons claiming title through or under him—

(a) the manufactured interest shall be treated as if it were a periodical payment of interest on the securities in question; and

(b) the gross amount of that deemed periodical payment of interest shall be taken to be equal to the gross amount of the interest of which the manufactured interest is representative.

(4) Sub-paragraph (2) above shall not require any deduction of tax to be made by the interest manufacturer if—

(a) the interest manufacturer is not resident in the United Kingdom, and

(b) the manufactured interest is paid otherwise than in the course of a trade carried on by the interest manufacturer in the United Kingdom through a branch or agency.

(5) Where, in a case falling within sub-paragraph (4)(a) and (b) above, the recipient—

(a) is resident in the United Kingdom, or

(b) (without being so resident) receives the manufactured interest for the purposes of a trade carried on by him in the United Kingdom through a branch or agency,

the recipient shall be liable to account for income tax in respect of the manufactured interest.

(6) The amount of the income tax for which the recipient is liable to account under sub-paragraph (5) above is the amount equal to the income tax which the interest manufacturer, had he been resident in the United Kingdom, would have been required, in respect of the manufactured interest, to account for and pay by virtue of sub-paragraph (2) above.

(7) For the purposes of sub-paragraph (2) above, if the interest manufacturer is a company which—

(a) is not resident in the United Kingdom, but

(b) carries on a trade in the United Kingdom through a branch or agency,

Schedule 16 shall have effect in relation to the manufactured interest as it has effect in the case of a company which is resident in the United Kingdom but as if, in paragraph 7, the words “section 11(3)” were substituted for the words “section 7(2)”.

(8) Where sub-paragraph (2) above has effect in the case of any manufactured interest so as to require any amount to be deducted by way of tax from the gross amount of the manufactured interest, the interest manufacturer shall, on paying the manufactured interest, provide the recipient with a statement in writing setting out—

(a) the gross amount of the manufactured interest;

(b) the amount deducted by way of tax by the interest manufacturer;

(c) the amount actually paid by the interest manufacturer; and

(d) the date of the payment by the interest manufacturer.

(9) The duty imposed by sub-paragraph (8) above shall be enforceable at the suit or instance of the recipient.

(10) The references in this paragraph to an amount being deductible are references to its being either—

(a) deductible in computing the amount of any of the interest manufacturer’s profits or gains for the purposes of income tax or corporation tax; or

(b) deductible for those purposes from the total income or, as the case may be, total profits of the interest manufacturer.

(11) For the purposes of this paragraph “the relevant purposes of the Tax Acts” means all the purposes of those Acts except the purposes of Chapter II of Part IV of the M1 Finance Act 1996 (loan relationships).

(12) Without prejudice to the generality of section 80(5) of the Finance Act 1996 (matters to be brought into account only under that Chapter), this paragraph does not have effect for determining how any manufactured interest falls to be treated for any purpose in relation to a company in relation to which that interest falls to be treated in accordance with section 97 of that Act.

(13) For the purposes of this paragraph references to the gross amount of any interest or payment are references to the amount of the interest or payment before the making of any deduction of income tax that is required to be deducted from it on its being paid or made.

Textual Amendments

F1 Words in s. 23A para. 3(2)(c) added (with effect in accordance with s. 108(7) of the amending Act) by Finance Act 2002 (c. 23), s. 108(4)

F2 Sch. 23A para 3(2A)(2B) inserted (with effect in accordance with s. 108(7) of the amending Act) by Finance Act 2002 (c. 23, s. 108(5)

F3 Words in Sch. 23A para. 2A(a) inserted (with effect in accordance with Sch. 7 para. 6(5) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 7 para. 6(2)(a)

F4 Sch. 23A para. 2A(b) substituted (with effect in accordance with Sch. 7 para. 6(5) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 7 para. 6(2)(b)

F5 Word in Sch. 23A para. 2A(b) substituted (with effect in accordance with Sch. 7 para. 6(4) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 7 para. 6(3)

Modifications etc. (not altering text)

C1 Sch. 23A paras. 3, 4 modified (with effect in accordance with s. 153(4) of the modifying Act) by Finance Act 2003 (c. 14), s. 153(2)(a)

C2 Sch. 23A para. 3(5) excluded (1.7.1997) by The Manufactured Interest (Tax) Regulations 1997 (S. I. 1997/992), regs. 1, 4

Marginal Citations

M1 1996 c. 8.