Manufactured interest
The measure
The Government announced on 27 January 2009, that it would legislatively respond to a recent court case that was concerned with the deductibility of a deemed manufactured interest payment under a sale and repurchase transaction, DCC Holdings (UK) Limited v Commissioners of HM Revenue & Customs [2008] EWHC 2429. The case was decided against HMRC in the High Court, holding that a deduction was allowed for the deemed payment of manufactured interest in accordance with the prescriptive rules in the loan relationships code, regardless of whether it was recognised for accounting purposes.
The announcement counteracts the decision by introducing legislation which ensures that a deduction for a deemed manufactured interest payment is only allowed where it is recognised for accounting purposes
In addition, today's announcement states that the deductibility of real manufactured interest payments (rather than deemed) has never been questioned, but that this High Court decision could also impact the understood tax analysis of such payments. To prevent this, legislation will be introduced retrospectively, such that a deduction for a real manufactured interest payment will only be allowed where it was also recognised in the accounts, which is in accordance with existing practice.
Who will be affected?
Companies that participate in any loan relationship stock loan or sale and repurchase transaction, where a manufactured interest payment is made or deemed to be made. This is likely to be most relevant to companies in the financial sector.
When?
The legislation is expected to be applicable to any deemed manufactured interest payments 'made' on or after 27 January 2009. However, in relation to any real manufactured interest payments, the legislation is intended to have retrospective application (and no defined starting date).
This is an expected response to a court decision in relation to a transaction that took advantage of very complicated and poorly drafted legislation. It is a little concerning to see the Government resort to retrospective legislation, as this is highly unusual and undermines an element of confidence and certainty in applying all current legislation. However, in this case, as its aim is to clarify the legislation to be consistent with the prevailing market practice there should be no wider concerns.
