Income Tax Act 2007

Manufactured interest on UK securities

578 Manufactured interest on UK securities

(1) This section applies if a person—

(a) pays another person an amount (“manufactured interest”) which is representative of a periodical payment of interest on UK securities, and

(b) does so under a requirement of an arrangement between them for the transfer of the securities.

(2) The Income Tax Acts apply in relation to the recipient, and persons claiming title through or under the recipient, as if—

(a) the manufactured interest were a periodical payment of interest on the securities, and

(b) the gross amount of the deemed interest payment were equal to the gross amount of the interest of which the manufactured interest is representative.

(3) If the payer is UK resident, or a person acting in the course of a trade carried on in the United Kingdom through a branch or agency, the Income Tax Acts apply in relation to the payer subject to sections 579 and 580 (allowable deductions).

(4) See also—

• section 919 (manufactured interest payments by UK residents etc: deduction of income tax at source), and

• section 920 (foreign payers of manufactured interest: the reverse charge).

(5) This section is subject to—

• section 583 (manufactured payments exceeding underlying payments),

• section 584 (manufactured payments less than underlying payments), and

• section 585 (power to deal with other special cases).

579 Allowable deductions: matching

(1) This section applies to a person who pays manufactured interest as mentioned in section 578(1).

(2) The gross amount of the manufactured interest is allowable for income tax purposes as a deduction in calculating the net income of the payer (see Step 2 of the calculation in section 23).

This is subject to subsection (3).

(3) It is allowable only so far as—

(a) it is not otherwise deductible, and

(b) it falls within subsection (4), (6) or (7).

(4) An amount falls within this subsection so far as the payer—

(a) receives either the periodical payment of interest which is represented by the manufactured interest or a payment which is representative of the periodical payment of interest, and

(b) is chargeable to income tax on the payment received.

(5) See section 679 (interest on securities involving accrued income losses: general) for the amount chargeable to income tax in a case where that section applies.

(6) An amount falls within this subsection so far as—

(a) the payer is, by virtue of Chapter 2 of Part 12 (accrued income profits), chargeable to income tax on qualifying accrued income profits in respect of transfers of securities, and

(b) the transfers are subject to the arrangement giving rise to the payment of manufactured interest.

(7) An amount falls within this subsection so far as the payer—

(a) is treated under section 607 (treatment of price differences under repos) as receiving a payment of interest in respect of the securities, and

(b) is chargeable to income tax on the payment.

(8) See section 580 for a further qualification to the rule in subsection (2).

(9) For the purposes of subsection (3)(a) an amount is deductible if it is—

(a) deductible in calculating any of the payer’s profits or gains for income tax purposes, or

(b) deductible for those purposes in calculating the net income of the payer.

(10) In this section “qualifying accrued income profits” means accrued income profits which are treated as made—

(a) under section 628(5), or

(b) under section 630(2) in respect of a transfer of variable rate securities.

580 Allowable deductions: restriction on double counting

(1) This section applies if an amount has been allowed as a deduction under section 579(2) by reference to the whole or part of—

(a) the periodical payment of interest, or other payment, mentioned in section 579(4)(a),

(b) the sum mentioned in section 579(6)(a), or

(c) the deemed payment of interest mentioned in section 579(7)(a).

(2) No further deduction is allowable by reference to all or part of the matched portion of the payment, sum or deemed payment.

(3) The “matched portion” of the payment, sum or deemed payment means—

(a) the whole of it, if the amount has been allowed as a deduction by reference to the whole of it, or

(b) the part of it by reference to which the amount has been allowed as a deduction, in any other case.