CFM17330 - Manufactured payments: unallowable purpose

Arrangements having an unallowable purpose

Companies

Paragraph 7A of Schedule 23A denies tax relief for manufactured payments where they arise under arrangements having an unallowable purpose. It applies only to manufacturers who are companies where the manufactured payment is paid after 2 July 2004. The rule has no effect on the recipient of the manufactured payment.

Before paragraph 7A can apply the following conditions must be met:

• a company must make, or be deemed to make, a manufactured payment in pursuance of arrangements to which it is party, and
• the arrangements, or any transaction entered into in pursuance of them, must have an unallowable purpose.

Tax avoidance is an unallowable purpose if it is the main or one of the main purposes for which the company is party to the arrangements. Tax avoidance means a purpose that consists in securing a tax advantage for the manufacturer or any other person. This is the same definition as in the loan relationship unallowable purpose rule CFM6210.

Reference should be made to Anti Avoidance Group in any case where it is thought that the unallowable purpose rule may apply.

Extension of the definition of manufactured payment for arrangements having an unallowable purpose

Manufactured payments in excess of the gross amount of dividends or interest that they represent are not treated as manufactured dividends or interest, but are deemed to be separate fees for all Taxes Act purposes by ICTA88/SCH23A/PARA7(1).

From 6 December 2006 the manufactured payments unallowable purpose rule is extended to cover such payments. This extension is in legislation at ICTA1988/SCH23A/PARA7A(10)(d).

Non-corporates

ITA07/s572A, which took effect from 31 January 2008, prevents avoidance of income tax by means of arrangements involving manufactured payments by individuals.

This legislation provides that a deduction is not to be allowed for income tax purposes for any manufactured payment paid in connection with arrangements where the main or one of the main purposes is to secure allowance of a deduction, or any other income tax advantage, for any person.

The term “arrangements” includes an agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

An “income tax advantage” means:

• a relief from income tax or increased relief from income tax (“relief from income tax” includes a tax credit)
• a repayment of income tax or increased repayment of income tax
• the avoidance, reduction or delay of a charge to income tax or assessment to income tax, or
• the avoidance of a possible assessment to income tax

This rule applies to manufactured payments representative of overseas dividends on overseas securities as well as manufactured payments representative of dividend payments on UK shares or interest on UK securities.

It is unusual for individuals to be involved in making manufactured payments. Consequently, in any case where any tax advantage arose from the making of such payments, it is highly likely that this would be part of avoidance arrangements.

Reference should be made to Anti-Avoidance Group in any case where it is thought that the avoidance arrangements rule may apply.