CFM17320 - Manufactured payments: treatment of manufactured payments

Treating manufactured payments as a real dividend or interest

The legislation and regulations seek, as far as possible, to treat the manufactured payment in the hands of the recipient and payer in the same way as if it were a real dividend or real interest, namely:

• as an interest receipt or payment if the underlying securities are debt instruments (ICTA88/SCH23A/PARA3 and FA96/S97, ITA07/S578 and ITA07/S581);
• as a UK dividend if the securities are UK shares (ICTA88/SCH23A/PARA2 and ITA07/S573);
• as a foreign dividend where the securities are overseas shares (ICTA88/SCH23A/PARA4 and ITA07/S581).

Detailed rules for their tax treatment are also found in regulations made by a number of Statutory Instruments. The rules interact with other provisions, most importantly the loan relationships legislation.

Excess manufactured payments constituting separate fees

Where a manufactured payment exceeds the gross amount of the dividends or interest that it represents, the amount of the excess is not treated as manufactured dividends or interest (ICTA88/SCH23A/PARA7(1). The excess is instead treated for all Taxes Act purposes as a separate fee for entering into the contract or other arrangement under which the payment is made. The fact that these separate fees are not treated as manufactured payments has been exploited in some tax avoidance schemes (see CFM17330).