Introduction Paragraph 5:
67.Paragraph 5 deals with manufactured interest payments made by companies.
68.Manufactured interest arises where under an arrangement for the transfer of debt securities (Government or corporate debt instruments) one party is required to pay to the other an amount that is representative of interest on those securities.
69.The amendments made by paragraph 5 are a response to the recent High Court case of DCC Holdings (UK) Ltd v HMRC [2008] EWHC 2429. It has been suggested that the analysis that in DCC led to the Judge allowing a deduction for a deemed section 737A of ICTA manufactured payment might lead to claims by companies for deductions for real payments of manufactured interest in excess of the amounts appearing in accounts prepared in accordance with GAAP.
70.This view appears to be based on comments in the case concerning the nature of the deemed loan relationship under which the manufactured interest is treated as payable. Some of the comments suggest the possibility that the Judge might have reached the same conclusion as to the deductibility of the manufactured interest even if a real payment had been made.
71.HMRC does not accept that this is the case, and other comments indicate that the Judge was concerned only with deemed payments, but the measure puts beyond doubt that the taxable amounts in respect of payments of manufactured interest are (subject to any express rule to the contrary) those that are recognised in accordance with GAAP. This ensures that all parties to transactions that involve the payment or receipt of manufactured interest are taxed in a fair and sensible way.