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The Government has announced that it plans to introduce legislation in the 2008 Finance Bill, taking effect from 31 January 2008, to prevent avoidance of income tax by means of arrangements involving manufactured payments.

The legislation will provide that a deduction is not to be allowed for income tax purposes for any manufactured payment paid in connection with arrangements where the main or one of the main purposes is to secure allowance of a deduction or any other income tax advantage.

The legislation will not apply to companies, for whom a separate anti avoidance rule for manufactured payments already exists.

“Manufactured payments” are payments that are representative of interest or dividends paid on securities such as gilts or shares. Manufactured payments typically arise as part of a sale and repurchase (‘repo’) or stocklending transactions. These are usually routine transactions between major financial market participants (e.g., banks, securities houses, insurance companies, pension funds, etc.) either to meet obligations to deliver stock or to borrow short-term money.

Nearly all manufactured payments are made by companies. Where, exceptionally, individuals are involved, there are tax rules that in some circumstance allow the payments to be deducted in computing the individuals’ taxable income.

The Government has become aware of a number of schemes set up for individuals who would never normally make manufactured payments. The individuals are all high net worth taxpayers whose involvement is generally as passive scheme users. In the schemes the individuals seek to obtain relief for making a manufactured payment but derive no loss from the wider transaction. Apart from the promoter’s fee, the transactions leave the individuals flat in economic terms, but are capable of eliminating all of the individuals’ liability to income tax in a given tax year.

The amendments ensure that none of the schemes will succeed where manufactured payments are made, or deemed to be made, on or after 31 January 2008.

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HMRC: Tax avoidance using manufactured payments