UK: Manufactured Payments

Last Updated: 18 January 2013
Article by Smith & Williamson


Legislation was introduced in Finance Act 2012 amending CTA10 s793 and s812 with effect from 15 September 2011, to clarify the corporation tax treatment of manufactured overseas dividends (MODs) received by companies. The amendments were aimed at ensuring MODs could not be used to obtain repayment or set off income tax that the UK Exchequer had not received.

The amendment followed disclosure of a new avoidance scheme in which the recipient of a MOD claims to have received it under deduction of UK income tax, which it then seeks to set off against its corporation tax liability, or to have repaid, although no actual UK income tax has been paid.

This led to consideration of reforming the manufactured payments legislation and a consultation was issued on 27 March 2012, proposing:

  • Simplification of the rules for relieving and taxing manufactured payments;
  • Abolition of rules requiring deduction of income tax from some manufactured payments.

Draft Finance Bill 2013 includes draft legislation giving effect to these changes as noted below, which will apply with effect to any payment representing a dividend or interest that is made on or after 1 January 2014


Finance Bill 2013 inserts a new Part 17A into CTA10 and a new Part 11ZA into ITA07. Draft legislation has been published today.

Under new Part 17A of CTA 2010 a company will be prevented from obtaining a tax deduction for any manufactured dividend unless either:

  • The company brings the payment into account under Part 3 of Corporation Tax Act 2009 (trading profits) in calculating the profits of a trade that it carries on; or
  • The payment is paid by the company in the course of an investment business that it carries on and the payment represents a dividend received by the company that is taxable by virtue of section 548(5) of CTA 2010 (recipients of distributions from REITs).

For corporation tax purposes the recipient of a manufactured dividend will be treated as if the payment were a dividend on the shares in question. This ensures that the tax treatment of the manufactured payment will follow that of the dividend that the payment represents.

This rule will not apply to a recipient for whom the manufactured payment is brought into account under Part 3 of CTA09 as a trading receipt. No special rules are needed to secure that such a payment is taxed as income.

The recipient of such a payment will not be entitled to any tax credit under s1109 of CTA10. This is unlikely to have any practical significance given that there is little that a company can do with such a tax credit.

With one exception the recipient will also not be entitled to double taxation relief in respect of the payment following the repeal of the requirement to deduct income tax from manufactured overseas dividends. The exception relates to any actual overseas tax deducted under the tax rules of a foreign territory from the manufactured payment.

These corporation tax changes will result in the repeal of almost all of Part 17 CTA10.

A person within the charge to income tax will be prevented from obtaining an income tax deduction for any manufactured dividend unless the payment is brought into account under Part 2 of ITTOIA05 (trading profits) in calculating the profits of a trade carried on by the person. Part 11ZA will provide that income tax will apply to the recipient of a manufactured dividend as if the payment were a dividend on the shares in question. This ensures that the tax treatment of the manufactured payment will follow that of the dividend that it represents.

This rule will not apply to a recipient for whom the manufactured payment is brought into account under Part 2 of ITTOIA05 as a trading receipt. No special rules are needed to secure that such a payment is taxed as income.

The recipient of such a payment will not be entitled to any tax credit under Chapter 3 of Part 4 of ITTOIA05. The recipient will also not be entitled to double taxation relief in respect of the payment following the repeal of the requirement to deduct income tax from manufactured overseas dividends. As with companies, this will not apply to any actual overseas tax deducted from the manufactured payment under the tax rules of a foreign territory.

Repeal of income tax deduction for MODs

Chapter 9 of part 15 ITA has been substantially amended so that the reverse charge provisions in respect of a UK recipient of manufactured interest payments are removed and the reverse charge and requirement to deduct tax from MODs are removed.

The new rules will apply only to MODs paid on or after 1 January 2014.

If the primary legislation relating to MODs is enacted in Finance Act 2013, the secondary MODs legislation in Regulations, of which the largest part is Statutory Instrument 1993/2004, will also be revoked. This will be done in time to take effect on 1 January 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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