CFM17405 - MODs: overseas equities – treatment of payer

Tax treatment of the payer of a MOD on an overseas equity

Companies

Where a manufactured overseas dividend is payable in the course of a trade carried on by the UK manufacturer, then it will be treated as a trading expense. This position is formalised by paragraph 4(1A) of Schedule 23A for accounting periods starting on or after 1 April 2004, but in practice most financial traders are likely to have submitted, and to have had accepted, computations based on this approach prior to the change.

Where a company has investment business to which the payment relates, then for accounting periods starting on or after 1 April 2004 it is treated for the purposes of section 75 of ICTA as an expense of management. Prior to this relief for a MOD on equities was normally available either as a management expense or charge, provided the payment could properly be characterised as such an amount.

For accounting periods starting on or after 1 April 2004, relief for payment of a MOD cannot be given unless the payment relates to the company’s trade or investment business.

Non-corporates

Deductibility will depend on the whether the payment is a legitimate business expense in connection with the individual’s trade, profession or vocation. No relief for the payment will be available if it is not deductible on ordinary trading income principles (Part 2 of ITTOIA 2005).

A manufactured payment in respect of a MOD on an overseas equity made on or after 31 January 2008 will not be deductible if it is paid, or any part of it is paid, in consequence of or otherwise in connection with avoidance arrangements.