Finance Act 2004

Section 136

SCHEDULE 24 Manufactured dividends

Amendments of sections 231AA, 231AB and 233 of the Taxes Act 1988

1 (1) In section 231AA of the Taxes Act 1988 (no tax credit for borrower under stock lending arrangement or interim holder under repurchase agreement) after subsection (1) insert—

“(1A) Where subsection (1) above applies to a relevant person in respect of a qualifying distribution, section 233 (1) (certain persons to be treated as having paid income tax at Schedule F ordinary rate on certain distributions etc) shall not apply in relation to that person in respect of that distribution.

In this subsection “relevant person” means a person resident in the United Kingdom, not being a company.”.

(2) In section 231AB of that Act (no tax credit for original owner under repurchase agreement in respect of certain manufactured dividends) after subsection (1) insert—

“(1A) Where subsection (1) above applies to a relevant person in respect of a qualifying distribution, section 233 (1) (certain persons to be treated as having paid income tax at Schedule F ordinary rate on certain distributions etc) shall not apply in relation to that person in respect of that distribution.

In this subsection “relevant person” means a person resident in the United Kingdom, not being a company.”.

(3) In section 233 of that Act (taxation of certain recipients of distributions etc) in subsection (1) (person other than United Kingdom resident company who is not entitled to tax credit on distribution: to be treated as having paid income tax at Schedule F ordinary rate on the distribution etc) at the end insert—

“But this subsection is subject to—

• section 231AA(1A) (section 233 (1) not to apply to borrower under stock lending arrangement or interim holder under repurchase agreement);

• section 231AB(1A) (section 233 (1) not to apply to original owner under repurchase agreement in respect of certain manufactured dividends).”.

(4) The amendment made by sub-paragraph (1) (and the amendment made by sub-paragraph (3) so far as relating to that amendment) have effect in relation to any qualifying distribution received by a relevant person on or after the commencement date where a manufactured dividend representative of that distribution is or was paid, or treated as paid, by him on or after that date.

(5) In sub-paragraph (4) “the commencement date” means—

(a) if the relevant person is an individual, 6th November 2003;

(b) if the relevant person is not an individual, 17th March 2004.

(6) The amendment made by sub-paragraph (2) (and the amendment made by sub-paragraph (3) so far as relating to that amendment) have effect in relation to any qualifying distribution received by a relevant person on or after the day on which this Act is passed.

Amendments of paragraph 2A of Schedule 23A to the Taxes Act 1988

2 (1) In Schedule 23A to the Taxes Act 1988 (manufactured dividends and interest) paragraph 2A (deductibility of manufactured payment in the case of the manufacturer) is amended as follows.

(2) For sub-paragraph (1) (amount of manufactured dividend paid allowable as deduction against total income, subject to sub-paragraph (1A)) substitute—

“(1) Where, in the case of a manufactured dividend, the dividend manufacturer is resident in the United Kingdom but is not a company, an amount (“the relevant amount”) equal to the lesser of—

(a) the amount of the manufactured dividend paid (so far as it is not otherwise deductible), and

(b) the amount of the dividend of which the manufactured dividend is representative,

shall be allowable as a deduction for the purposes of income tax only under sub-paragraph (1ZA) or (1A) below.”.

(3) After sub-paragraph (1) insert—

“(1ZA) The relevant amount shall be allowable under this sub-paragraph as a deduction for the purposes of income tax to the extent that the dividend manufacturer—

(a) receives the dividend on the equities which is represented by the manufactured dividend or receives a payment which is representative of that dividend, and

(b) is chargeable to income tax on the dividend or other payment so received;

and that deduction shall be made against the amount of the dividend or other payment so received on which the dividend manufacturer is chargeable to income tax.

(1ZB) Sub-paragraph (1ZA) above shall apply only if the amount of the dividend or other payment so received is received by the dividend manufacturer in—

(a) the year of assessment in which he pays the manufactured dividend, or

(b) the year of assessment immediately before, or immediately after, that year.”.

(4) In sub-paragraph (1A) (circumstances in which amount of manufactured dividend paid is allowable as deduction against total income)—

(a) in the opening words, for the words from “An amount shall” to “only” substitute “The relevant amount shall be allowable under this sub-paragraph as a deduction for the purposes of income tax against the total income of the dividend manufacturer”,

(b) omit paragraph (a),

(c) omit paragraph (c) and the word “or” before it, and

(d) omit the words following paragraph (c).

(5) In sub-paragraph (1B) (no double deduction allowed)—

(a) for “sub-paragraph (1)” (in both places) substitute “sub-paragraph (1ZA) or (1A)”,

(b) in paragraph (a), for “paragraph (a) of sub-paragraph (1A)” substitute “sub-paragraph (1ZA)” and at the end insert “, or”,

(c) in paragraph (b), for “paragraph (b) of that sub-paragraph” substitute “sub-paragraph (1A) above”,

(d) omit paragraph (c) and the word “or” before it, and

(e) for “, other payment or chargeable gain” (in both places) substitute “or other payment”.

(6) In sub-paragraph (4) (meaning of “deductible”)—

(a) in paragraph (a), omit “or corporation tax”, and

(b) in paragraph (b), omit “or, as the case may be, total profits”.

(7) Subject to sub-paragraph (10), the amendments made by sub-paragraphs (3), (4)(b) and (5)(b) (and the amendments made by sub-paragraphs (2) and (5)(a) so far as relating to those amendments) have effect in relation to a manufactured dividend paid, or treated as paid, by a dividend manufacturer on or after the commencement date where the dividend or other payment of which that manufactured dividend is representative is or was received by him on or after that date.

(8) In sub-paragraph (7) “the commencement date” means—

(a) if the dividend manufacturer is an individual, 6th November 2003;

(b) if the dividend manufacturer is not an individual, 17th March 2004.

(9) Subject to sub-paragraph (10), the amendments made by sub-paragraphs (4)(a) and (5)(c) (and the amendments made by sub-paragraphs (2) and (5)(a) so far as relating to those amendments) have effect in relation to a manufactured dividend paid, or treated as paid, by a dividend manufacturer on or after 17th March 2004.

(10) In relation to a manufactured dividend paid, or treated as paid, by a dividend manufacturer before the day on which this Act is passed, the sub-paragraph (1) of paragraph 2A of Schedule 23A to the Taxes Act 1988 substituted by sub-paragraph (2) of this paragraph shall have effect with the omission of—

(a) the words “the lesser of”, and

(b) paragraph (b) and the word “and” before it.

(11) The amendments made by sub-paragraphs (4)(c) and (d) and (5)(d) and (e) have effect in relation to cases where—

(a) the manufactured dividend is or was paid, or treated as paid, by the dividend manufacturer on or after 17th March 2004, or

(b) the chargeable gain accrues or accrued to the dividend manufacturer on or after that date.

Amendment of the Taxation of Chargeable Gains Act 1992

3 (1) After section 263C of the Taxation of Chargeable Gains Act 1992 (c. 12) insert—

“263D Gains accruing to persons paying manufactured dividends

(1) This section applies where one of the following conditions is satisfied in relation to a person who—

(a) is resident in the United Kingdom, but

(b) is not a company.

(2) Condition 1 is that—

(a) the person is the interim holder under a repurchase agreement,

(b) he disposes of any United Kingdom equities transferred to him under that agreement,

(c) a chargeable gain accrues to him on that disposal, and

(d) under that agreement, he pays a manufactured dividend which is representative of a dividend on those United Kingdom equities.

(3) Condition 2 is that—

(a) the person is the borrower under a stock lending arrangement,

(b) he disposes of any United Kingdom equities transferred to him under that arrangement,

(c) a chargeable gain accrues to him on that disposal, and

(d) under that arrangement, he pays a manufactured dividend which is representative of a dividend on those United Kingdom equities.

(4) Condition 3 is that—

(a) the person is a party to a contract or other arrangements for the transfer of United Kingdom equities which is neither a repurchase agreement nor a stock lending arrangement (“the short sale transaction”),

(b) he disposes of the United Kingdom equities under the short sale transaction,

(c) a chargeable gain accrues to him on that disposal, and

(d) under that transaction, he pays a manufactured dividend which is representative of a dividend on those United Kingdom equities.

(5) For the purposes of capital gains tax, a loss shall be treated as accruing to the person on the date on which the chargeable gain mentioned in Condition 1, 2 or 3 accrued to him.

(6) The amount of that loss shall be equal to the lesser of—

(a) the amount of that chargeable gain, and

(b) the adjusted amount.

(7) In subsection (6) above “the adjusted amount” means—

A - B

where—

• A is the lesser of—

  (a)

  the amount of the manufactured dividend paid, and

  (b)

  the amount of the dividend of which the manufactured dividend is representative; and

• B is an amount equal to so much of the manufactured dividend paid as is allowable to the person as a deduction for the purposes of income tax under paragraph 2A of Schedule 23A to the Taxes Act.

(8) But that loss shall not be deductible except from the chargeable gain mentioned in Condition 1, 2 or 3.

(9) For the purposes of this section “manufactured dividend” has the same meaning as in paragraph 2 of Schedule 23A to the Taxes Act; and any reference to a manufactured dividend being paid—

(a) includes a reference to a payment falling by virtue of section 737A(5) of that Act to be treated for the purposes of Schedule 23A as if it were made, but

(b) does not include a reference to a payment falling by virtue of section 736B(2) of that Act to be treated for the purposes of that Schedule as if it were made.

(10) For the purposes of this section the cases where there is a repurchase agreement are the following—

(a) any case falling within subsection (1) of section 730A of the Taxes Act, and

(b) any case which would fall within that subsection if the sale price and the repurchase price were different;

and, in any such case, any reference to the interim holder shall be construed accordingly.

(11) In this section “stock lending arrangement” has the same meaning as in section 263B of this Act; and, in relation to any such arrangement, any reference to the borrower shall be construed accordingly.

(12) In this section “United Kingdom equities” has the meaning given by paragraph 1 (1) of Schedule 23A to the Taxes Act.”.

(2) In section 737E of the Taxes Act 1988 (power to modify sections 727A, 730A, 730BB and 737A to 737C)—

(a) in subsection (4) (powers to modify also exercisable in relation to section 263A of the Taxation of Chargeable Gains Act 1992) after “263A” insert “or 263D”, and

(b) in subsection (6)(b) (particular power to modify in relation to section 263A of that Act) after “263A” insert “or 263D”.

(3) The amendments made by sub-paragraphs (1) and (2) have effect in relation to cases where—

(a) the manufactured dividend is or was paid, or treated as paid, by the person on or after 17th March 2004, or

(b) the chargeable gain accrues or accrued to the person on or after that date.