Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 11 — Manufactured payments and repos
Chapter 1 — Introduction
296

567
Meaning of “overseas securities” and “overseas dividend”
(1)
This section applies for the purposes of this Part.
(2)
“Overseas securities” means shares, stock or other securities issued by—
(a)
a government, local authority or other public authority of a territory
outside the United Kingdom, or
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(b)
another non-UK resident body of persons.
(3)
“Overseas dividend” means any interest, dividend or other annual payment
payable in respect of overseas securities.
(4)
In this section “securities” includes loan stock or any similar security.
568
Meaning of “stock lending arrangement”
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(1)
For the purposes of this Part there is a stock lending arrangement in respect of
securities if—
(a)
a person (“the lender”) has transferred the securities to another person
(“the borrower”) otherwise than by way of sale,
(b)
the securities are UK shares, UK securities or overseas securities,
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(c)
the transfer is under an arrangement between the lender and the
borrower, and
(d)
under the arrangement, the borrower is required to transfer the
securities back to the lender otherwise than by way of sale.
(2)
The reference in subsection (1)(d) to the transfer of the securities back to the
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lender includes a reference to—
(a)
a transfer within subsection (3), and
(b)
a payment within subsection (5).
(3)
A transfer is within this subsection if it is a transfer to the lender of securities
of the same description as the securities—
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(a)
in accordance with a requirement to do so, or
(b)
in exercise of a power to substitute securities of the same description for
the securities that are required to be transferred back.
(4)
For the purposes of subsection (3), securities are taken to be of the same
description as other securities if (and only if) they—
30
(a)
are in the same quantities,
(b)
give the same rights against the same persons, and
(c)
are of the same type and nominal value,

as the other securities.
(5)
A payment is within this subsection if it is a payment to the lender, in
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pursuance of a redemption obligation, of an amount equal to the amount of the
entitlement under the redemption obligation.
(6)
A redemption obligation is an obligation that arises on a person’s becoming
entitled to receive an amount in respect of the redemption of the securities.
569
Meaning of “repo”
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(1)
For the purposes of this Part there is a repo in respect of securities if conditions
A, B and C are met.

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Part 11 — Manufactured payments and repos
Chapter 1 — Introduction
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(2)
Condition A is that a person (“the original owner”) has agreed to sell the
securities to another person (“the interim holder”).
(3)
Condition B is that the securities are UK shares, UK securities or overseas
securities.
(4)
Condition C is that the original owner or a person connected with the original
5
owner—
(a)
is required to buy back the securities by the agreement or a related
agreement,
(b)
is required to buy back the securities under an obligation imposed as a
result of the exercise of an option acquired under the agreement or a
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related agreement, or
(c)
exercises an option to buy back the securities which was acquired
under the agreement or a related agreement.
570
Meaning of “buying back” securities etc
(1)
This section applies for the purposes of this Part, in the context of a repo.
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(2)
References to buying back securities include references to—
(a)
buying similar securities, and
(b)
in the case of a person connected with the person who is the original
owner under the repo, buying the securities sold by the original owner
or similar securities.
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(3)
Subsection (2) applies even if the person buying the securities has not held
them before.
(4)
References to repurchase or a repurchaser are to be read accordingly.
(5)
For the purposes of subsection (2) securities are similar if they give their
holders—
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(a)
the same rights against the same persons as to capital and distributions,
interest and dividends, and
(b)
the same remedies to enforce those rights.
(6)
Subsection (5) applies even if there is a difference in—
(a)
the total nominal amounts of the securities,
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(b)
the form in which they are held, or
(c)
the manner in which they can be transferred.
571
Meaning of “related” agreements
Agreements are related for the purposes of this Part if they are entered into in
pursuance of the same arrangement (regardless of the date on which either
35
agreement is entered into).

Income Tax Bill
Part 11 — Manufactured payments and repos
Chapter 2 — Manufactured payments
298

Chapter 2
Manufactured payments
Introduction
572
Overview of Chapter
This Chapter is about the situation where a person—
5
(a)
pays another person an amount which is representative of—
(i)
dividends on UK shares,
(ii)
periodical payments of interest on UK securities, or
(iii)
overseas dividends on overseas securities, and
(b)
does so under a requirement of an arrangement between them for the
10
transfer of the UK shares, UK securities or overseas securities
concerned.
Manufactured dividends on UK shares
573
Manufactured dividends on UK shares
(1)
This section applies if a person—
15
(a)
pays another person an amount (a “manufactured dividend”) which is
representative of a dividend on UK shares, and
(b)
does so under a requirement of an arrangement between them for the
transfer of the shares.
(2)
The Income Tax Acts apply in relation to the recipient, and persons claiming
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title through or under the recipient, as if the manufactured dividend were a
dividend on the shares.
(3)
If the payer is a UK resident company, the Income Tax Acts apply in relation
to the payer as if the manufactured dividend were a dividend of the company.
(4)
If the payer is UK resident and is not a company, the Income Tax Acts apply in
25
relation to the payer subject to sections 574 and 575 (allowable deductions).
(5)
This section is subject to—
(a)
section 576 (manufactured dividends on UK shares: Real Estate
Investment Trusts),
(b)
section 583 (manufactured payments exceeding underlying payments),
30
and
(c)
section 585 (power to deal with other special cases).
574
Allowable deductions: matching
(1)
This section applies if a person who pays a manufactured dividend as
mentioned in section 573(1) is UK resident and is not a company.
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(2)
An amount equal to the lesser of—
(a)
the amount of the manufactured dividend, and
(b)
the amount of the dividend of which the manufactured dividend is
representative,

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Part 11 — Manufactured payments and repos
Chapter 2 — Manufactured payments
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is allowable as a deduction for income tax purposes, subject to subsection (3).
(3)
It is allowable only so far as—
(a)
it is not otherwise deductible, and
(b)
it falls within subsection (4) or (7).
(4)
An amount falls within this subsection so far as the payer—
5
(a)
receives either the dividend which is represented by the manufactured
dividend or a payment which is representative of that dividend, and
(b)
is chargeable to income tax on the dividend or payment received.
(5)
An amount falls within subsection (4) only if the amount of the dividend or
payment received is received by the payer in—
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(a)
the tax year in which the payer pays the manufactured dividend, or
(b)
the tax year immediately before, or immediately after, that year.
(6)
An amount which falls within subsection (4) is allowable as a deduction only
from the amount of the dividend or payment received on which the payer is
chargeable to income tax.
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(7)
An amount falls within this subsection so far as the payer—
(a)
is treated under section 607 (treatment of price differences under repos)
as receiving a payment of interest in respect of the shares, and
(b)
is chargeable to income tax on the payment.
(8)
An amount which falls within subsection (7) is allowable as a deduction in
20
calculating the net income of the payer (see Step 2 of the calculation in section
23).
(9)
See section 575 for a further qualification to the rule in subsection (2).
(10)
For the purposes of subsection (3)(a) an amount is deductible if it is—
(a)
deductible in calculating any of the payer’s profits or gains for income
25
tax purposes, or
(b)
deductible for those purposes in calculating the net income of the
payer.
575
Allowable deductions: restriction on double-counting
(1)
This section applies if an amount has been allowed as a deduction under
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section 574(2) by reference to the whole or part of—
(a)
the dividend or payment mentioned in section 574(4)(a), or
(b)
the deemed payment of interest mentioned in section 574(7)(a).
(2)
No further deduction is allowable by reference to all or part of the matched
portion of the dividend, payment or deemed payment.
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(3)
The “matched portion” of the dividend, payment or deemed payment means—
(a)
the whole of it, if the amount has been allowed as a deduction by
reference to the whole of it, or
(b)
the part of it by reference to which the amount has been allowed as a
deduction, in any other case.
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576
Manufactured dividends on UK shares: Real Estate Investment Trusts
(1)
This section applies (instead of section 573(2) and (3)) if—

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Part 11 — Manufactured payments and repos
Chapter 2 — Manufactured payments
300

(a)
a person pays a manufactured dividend as mentioned in section 573(1),
and
(b)
the manufactured dividend is representative of a dividend which is—
(i)
paid by a company to which Part 4 of FA 2006 applies (Real
Estate Investment Trusts) in respect of profits of C (tax-exempt),
5
or
(ii)
paid by the principal company of a group to which that Part
applies in respect of profits of G (property rental business).
(2)
This section applies only so far as the manufactured dividend is representative
of such a dividend.
10
(3)
The Income Tax Acts apply in relation to the recipient, and persons claiming
title through or under the recipient, as if the manufactured dividend were a
dividend to which section 121 of FA 2006 applied (distributions treated as UK
property business profits).
(4)
This section is subject to—
15
(a)
section 583 (manufactured payments exceeding underlying payments),
and
(b)
section 585 (power to deal with other special cases).
577
Statements about manufactured dividends
(1)
Subsections (3) to (7) apply to a person who—
20
(a)
pays a manufactured dividend as mentioned in section 573(1), and
(b)
is not within the charge to corporation tax.
(2)
But those subsections do not apply so far as the manufactured dividend is
representative of a dividend which is—
(a)
paid by a company to which Part 4 of FA 2006 applies (Real Estate
25
Investment Trusts) in respect of profits of C (tax-exempt), or
(b)
paid by the principal company of a group to which that Part applies in
respect of profits of G (property rental business).
(3)
The person must, at the same time as paying the manufactured dividend, give
the recipient a statement.
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(4)
The statement must set out—
(a)
the amount of the manufactured dividend,
(b)
the date of its payment, and
(c)
the amount of associated tax credit.
(5)
The statement must be in writing.
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(6)
The amount of associated tax credit is the amount of tax credit to which the
recipient, or a person claiming title through or under the recipient—
(a)
is entitled in respect of the manufactured dividend as a result of section
573(2) of this Act or paragraph 2(3)(b) of Schedule 23A to ICTA
(manufactured dividend treated as dividend), or
40
(b)
would be so entitled if all the conditions for a tax credit had been met
in the case of the deemed dividend and the recipient or that person.
(7)
The duty under subsection (3) to give a statement is enforceable by the
recipient.

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Part 11 — Manufactured payments and repos
Chapter 2 — Manufactured payments
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(8)
For provisions corresponding to subsections (3) to (7) which apply if the payer
of a manufactured dividend is within the charge to corporation tax see—
(a)
section 234A of ICTA (by virtue of paragraph 2(2)(b) of Schedule 23A
to ICTA), if the payer is a UK resident company, and
(b)
paragraph 2(6) to (8) of Schedule 23A to ICTA, if the payer is a non-UK
5
resident company within the charge to corporation tax.
(9)
For a power for regulations to make provision corresponding to subsections (3)
to (7) for a case within subsection (2), see section 906 as applied by section
851(3) (and in particular section 907(1)(k)).
Manufactured interest on UK securities
10
578
Manufactured interest on UK securities
(1)
This section applies if a person—
(a)
pays another person an amount (“manufactured interest”) which is
representative of a periodical payment of interest on UK securities, and
(b)
does so under a requirement of an arrangement between them for the
15
transfer of the securities.
(2)
The Income Tax Acts apply in relation to the recipient, and persons claiming
title through or under the recipient, as if—
(a)
the manufactured interest were a periodical payment of interest on the
securities, and
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(b)
the gross amount of the deemed interest payment were equal to the
gross amount of the interest of which the manufactured interest is
representative.
(3)
If the payer is UK resident, or a person acting in the course of a trade carried
on in the United Kingdom through a branch or agency, the Income Tax Acts
25
apply in relation to the payer subject to sections 579 and 580 (allowable
deductions).
(4)
See also—
section 852 (manufactured interest payments by UK residents etc:
deduction of income tax at source), and
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section 853 (foreign payers of manufactured interest: the reverse charge).
(5)
This section is subject to—
section 583 (manufactured payments exceeding underlying payments),
section 584 (manufactured payments less than underlying payments), and
section 585 (power to deal with other special cases).
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579
Allowable deductions: matching
(1)
This section applies to a person who pays manufactured interest as mentioned
in section 578(1).
(2)
The gross amount of the manufactured interest is allowable for income tax
purposes as a deduction in calculating the net income of the payer (see Step 2
40
of the calculation in section 23).

This is subject to subsection (3).
(3)
It is allowable only so far as—

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Part 11 — Manufactured payments and repos
Chapter 2 — Manufactured payments
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(a)
it is not otherwise deductible, and
(b)
it falls within subsection (4), (6) or (7).
(4)
An amount falls within this subsection so far as the payer—
(a)
receives either the periodical payment of interest which is represented
by the manufactured interest or a payment which is representative of
5
the periodical payment of interest, and
(b)
is chargeable to income tax on the payment received.
(5)
See section 714(5) of ICTA (accrued income scheme: treatment of deemed sums
and reliefs) for the amount chargeable to income tax in a case where section
714(4) of that Act applies.
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(6)
An amount falls within this subsection so far as—
(a)
the payer is, by virtue of section 714(2) of ICTA (accrued income
scheme: treatment of deemed sums and reliefs), chargeable to income
tax on income in respect of transfers of securities, and
(b)
the transfers are subject to the arrangement giving rise to the payment
15
of manufactured interest.
(7)
An amount falls within this subsection so far as the payer—
(a)
is treated under section 607 (treatment of price differences under repos)
as receiving a payment of interest in respect of the securities, and
(b)
is chargeable to income tax on the payment.
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(8)
See section 580 for a further qualification to the rule in subsection (2).
(9)
For the purposes of subsection (3)(a) an amount is deductible if it is—
(a)
deductible in calculating any of the payer’s profits or gains for income
tax purposes, or
(b)
deductible for those purposes in calculating the net income of the
25
payer.
580
Allowable deductions: restriction on double counting
(1)
This section applies if an amount has been allowed as a deduction under
section 579(2) by reference to the whole or part of—
(a)
the periodical payment of interest, or other payment, mentioned in
30
section 579(4)(a),
(b)
the sum mentioned in section 579(6)(a), or
(c)
the deemed payment of interest mentioned in section 579(7)(a).
(2)
No further deduction is allowable by reference to all or part of the matched
portion of the payment, sum or deemed payment.
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(3)
The “matched portion” of the payment, sum or deemed payment means—
(a)
the whole of it, if the amount has been allowed as a deduction by
reference to the whole of it, or
(b)
the part of it by reference to which the amount has been allowed as a
deduction, in any other case.
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