Where the recipient is within the loan relationships regime,
FA96/S97 deems the manufactured interest to be interest on the loan
relationship on which the real interest is payable.
This means that a stock lender or repo original owner within
loan relationships will remain taxable on the accrual it makes in
its accounts which relates to the interest on the securities
concerned, whether what it actually receives is the real or
manufactured interest. If the manufactured interest suffers
deduction of tax then the recipient will deal with this in the same
way as it would deal with tax deducted from a payment of real
interest.
The recipient is treated as having received a real interest payment on the securities in question. Where, unusually, the manufactured interest has borne income tax the recipient is treated as having received the payment under deduction of tax. If the manufactured interest plus tax is greater than the gross amount of the real interest, the excess is treated as a fee for entering into the transaction. If it is smaller, then the recipient is nevertheless taxed on an amount equal to the gross amount of the real interest.
