Proposed changes to tax rules on manufactured payments

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Contents 1 2 3 4 Annex Introduction Simplification of <strong>tax</strong> <strong>rules</strong> Income <strong>tax</strong> deduction <strong>rules</strong> Summary of proposals and next steps List of respondents On request this document can be produced in Welsh and alternative formats including large print, audio and Braille formats 2 3 5 7 9 10
1. Introduction 1.1 HMRC published a consultation document on possible <strong>changes</strong> <strong>to</strong> the <strong>tax</strong>ation of manufactured payments on 27 March 2012. The consultation closed on 22 June 2012. This document summarises the responses received and explains HMRC’s further proposals on this subject. 1.2 The aim of the consultation was <strong>to</strong> seek views on proposals for: • • Simplification of the <strong>rules</strong> for relieving and <strong>tax</strong>ing manufactured payments; Abolition of <strong>rules</strong> requiring deduction of income <strong>tax</strong> from some manufactured payments. 1.3 The Consultation Document made proposals for legislative <strong>changes</strong> in the following areas: • Simplification of <strong>rules</strong> for <strong>tax</strong>ing and relieving manufactured payments relating <strong>to</strong> shares: the <strong>tax</strong> code currently contains detailed <strong>rules</strong> for <strong>tax</strong>ing and relieving manufactured payments. Many of these are unnecessary. Most payments are made and received by financial traders, for whom such payments will ordinarily be <strong>tax</strong>able as trading income or deductible as trading expenses without the need for special <strong>rules</strong>. The consultation document therefore proposed that the <strong>rules</strong> applicable in such cases should be repealed. For other market participants, the consultation document proposed that the recipient would be <strong>tax</strong>able only if the real dividend would have been, while the payer would normally obtain a <strong>tax</strong> deduction only if a) it relates <strong>to</strong> a company’s investment business and b) the company elects <strong>to</strong> be <strong>tax</strong>ed on the real dividend of which the manufactured dividend is representative. • No <strong>changes</strong> were proposed <strong>to</strong> the <strong>rules</strong> regarding the deductibility or <strong>tax</strong>ability of manufactured interest payments. • Income <strong>tax</strong> deduction <strong>rules</strong>: financial institutions making manufactured overseas dividends (MODs, a type of manufactured payment) are subject <strong>to</strong> a requirement <strong>to</strong> deduct income <strong>tax</strong> when paying them <strong>to</strong> another UK resident recipient (but not where the payment is made <strong>to</strong> an overseas recipient). The UK recipient can then claim credit for the <strong>tax</strong> as if it were overseas <strong>tax</strong> eligible for double <strong>tax</strong>ation relief. The <strong>rules</strong> are complex, with entitlements <strong>to</strong> offset <strong>tax</strong> suffered against the <strong>tax</strong> <strong>to</strong> be deducted and numerous exemptions from the obligation <strong>to</strong> deduct. They have been widely exploited in avoidance schemes in recent years, and the consultation was part of the rolling review of high risk areas of the <strong>tax</strong> code. The consultation document proposed <strong>changes</strong> so that <strong>tax</strong> would no longer have <strong>to</strong> be deducted and the recipient would no longer be able <strong>to</strong> obtain the benefit of that <strong>tax</strong>. 1.4 Nine responses were received in <strong>to</strong>tal, from representative bodies, professional firms, market practitioners and a charity. 3
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Proposed changes to tax rules on manufactured payments

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