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The Financial Secretary to the Treasury, the Right Honourable Stephen Timms MP, has confirmed that legislation will be introduced in the next  Finance Bill to prevent a recent decision of the High Court from affecting the tax treatment of real payments of manufactured interest.

The legislation will ensure that tax treatment follows the treatment of the payments in company accounts prepared in accordance with Generally Accepted Accounting Practice ('GAAP').

The recent case of DCC Holdings (UK) Ltd v HMRC [2008] EWHC 2429 involved the tax treatment of deemed manufactured payments, but the decision cast doubt on the tax treatment of real manufactured payments for both payers and recipients. The decision could result in payers being able to claim additional deductions for tax purposes that bear no relation to their economic position, and recipients being taxable on amounts in excess of their actual income.

Before the High Court decision, the tax treatment of real payments of manufactured interest had never been questioned. To ensure the decision does not have adverse consequences either for the Exchequer or for taxpayers this legislation will apply to past payments relating to open accounting periods as well as to payments made on or after 27 January 2009, and will ensure that existing practice is followed.

The legislation will not apply to deemed manufactured interest (which was the subject of the High Court case) treated as paid before 27 January 2009. Unlike actual payments, the tax treatment of deemed payments has been in doubt for some time. Accordingly for deemed payments the legislation will apply only to payments made on or after 27 January 2009.

A copy of the draft legislation together with draft explanatory notes and full background material is available on the HMRC website at http://www.hmrc.gov.uk/news/manufactured-payments.htm.