Annex 1: Minor changes in the law Change 51: Manufactured payments and repos: definition of “manufactured interest”: section 801 and Schedule 1
This change:
	adopts the definition of “manufactured interest” used in the loan relationships regime in rewriting the unallowable purpose test for manufactured payments; and
	abolishes the power to apply, with modifications, prescribed provisions of TMA to manufactured interest.
Section 539 of CTA 2009 (relationships treated as loan relationships etc: manufactured interest etc) defines “manufactured interest” in relation to a manufactured interest relationship. A company has a manufactured interest relationship if (a) an amount is payable by or on behalf of a company or to a company under arrangements relating to the transfer of an asset representing a loan relationship and (b) this amount either (i) is representative of interest under the loan relationship or (ii) falls to be treated as representative of such interest when it is paid. Such an amount is “manufactured interest”.
“Loan relationship” is defined in section 302 of CTA 2009. Also, Part 6 of that Act treats certain other matters as loan relationships.
Paragraph 1(1) of Schedule 23A to ICTA defines “manufactured interest” as:
“an amount –(a)which is representative of a periodical payment of interest on United Kingdom securities [as defined in paragraph 1(1) of that Schedule], and(b)which, under a contract or other arrangements for the transfer of the securities, one of the parties is required to pay to the other”
These two definitions are similar but not the same.
“Manufactured interest” as defined in CTA 2009, unlike “manufactured interest” as defined in ICTA, does not necessarily relate to United Kingdom securities. Paragraph 4(1) of Schedule 23A to ICTA however, provides:
“This paragraph applies in any case where, under a contract or other arrangements for the transfer of overseas securities, one of the parties (the “overseas dividend manufacturer”) is required to pay to the other (“the recipient”) an amount representative of an overseas dividend on the overseas securities; and in this Schedule the “manufactured overseas dividend” means any payment which the overseas dividend manufacturer makes in discharge of that requirement”
Paragraph 1(1) of Schedule 23A to ICTA gives “overseas securities” a wide definition, and any manufactured interest as defined in CTA 2009 which does not relate to United Kingdom securities is a MOD. (The converse does not hold; a MOD relating to foreign shares is not manufactured interest within either definition.)
Broadly speaking, therefore, manufactured interest as defined in CTA 2009 is either manufactured interest as defined in ICTA or else a MOD.
There are two technical differences between the two definitions of “manufactured interest”.
First, “United Kingdom securities” is defined using the expression “securities”, which is non-exhaustively defined in paragraph 1(1) of Schedule 23A to ICTA as including any loan stock or similar security. It is logically possible for an instrument to rank as a “United Kingdom security” as defined in paragraph 1(1) without being a loan relationship as defined in CTA 2009. In this respect, the ICTA definition is wider than the CTA 2009 definition.
Second, “manufactured interest” as defined in CTA 2009, unlike “manufactured interest” as defined in ICTA, is not necessarily representative of a periodical payment. In this respect, the CTA 2009 definition is wider than the ICTA definition.
“Manufactured interest” is defined in these two different ways for historical reasons. Schedule 23A to ICTA (manufactured dividends and interest) was inserted by FA 1991; in that Schedule, “manufactured interest” was chiefly used in provisions relating to income tax which have since been rewritten in ITA. By contrast, CTA 2009 uses “manufactured interest” in the corporation tax provisions relating to loan relationships, which are based on FA 1996. The income tax provisions of Schedule 23A to ICTA were rewritten in Chapter 2 of Part 11 and Chapter 9 of Part 15 of ITA and repealed.
“Manufactured interest”, as defined in paragraph 1(1) of Schedule 23A to ICTA, is used in:
	the definition of “manufactured payment” in paragraph 7A(10) of that Schedule (manufactured payments under arrangements having an unallowable purpose); and
	the power given by paragraph 8(3)(a) of that Schedule to apply, with modifications, prescribed provisions of TMA to manufactured interest.
The opportunity has been taken to simplify and harmonise the corporation tax legislation by adopting the CTA 2009 definition of “manufactured interest” in rewriting paragraph 7A(10) of Schedule 23A in section 801 of this Act.
In principle, adopting the CTA 2009 definition of “manufactured interest” in section 801 of this Act changes the scope of the unallowable purpose test for manufactured payments, because it narrows the definition of “manufactured interest” in one respect and broadens the definition in another respect. In principle, the former change to the definition is favourable to some taxpayers and the latter change is adverse to some taxpayers.
But, in the context of this provision, the technical differences between the two definitions of “manufactured interest” do not amount to any difference in practice.
As paragraph 8(3)(a) of Schedule 23A to ICTA has been superseded by Corporation Tax Self Assessment, Schedule 1 repeals it as unnecessary. The Treasury has not exercised its power to make regulations for corporation tax purposes under paragraph 8(3)(a). Abolishing this power therefore has no practical effect.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.