Clause 73 - Manufactured payments: stock lending arrangements

Finance Bill – in a Public Bill Committee am 3:00 pm ar 11 Mehefin 2013.

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Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 3:00, 11 Mehefin 2013

The clause has been introduced to close a tax avoidance activity involving manufactured payments in the area of stock lending arrangements.  Most manufactured payments are made and received by banks and other financial traders and, as the tax information and impact note explains, are payments representative of dividends and interest on shares and securities, whether paid under contracts or other arrangements for their transfer. The Committee may be aware that manufactured payments are routinely paid in the financial markets under stock lending or repo transactions. A manufactured payment is a compensation payment made by the temporary holder of the shares or securities to the original owner to reflect the fact that the original owner does not receive the real dividend or interest. Manufactured payments would fall to be taxed as ordinary trading expenses and receipts.

The field is an extremely complex one. An avoidance scheme has been identified in the area of stock lending arrangements that attempts to prevent a tax charge arising when a manufactured payment made to represent the dividend or interest arising on the securities that have been lent would be taxed as trading income. The avoidance scheme attempts to avoid that charge by arranging for some manufactured payments to be made, but also for part of the payment representing the dividend to be received in a non-taxable form. That explains the background to the clause, which amends the relevant sections of the Income Tax Act 2007 and the Corporation Tax Act 2010 to provide that when any benefit is received representing the dividend, it will give rise to a charge on the stock lender as though an actual manufactured payment had been received.

The tax information and impact note suggests that the measure will have a negligible impact on the Exchequer. Will the Minister clarify what impact the use of the avoidance scheme has had on the Exchequer to date, and why so little future impact is expected? The impact note also outlines that 100 businesses enter into or administer stock loans and repos of shares and securities where there is a payment and/or receipt of a manufactured dividend. How many of the 100 firms have been making use of the avoidance scheme and over what period? In the light of that loophole being identified, what action, if any, is Her Majesty’s Revenue and Customs taking against them?

Photo of David Gauke David Gauke The Exchequer Secretary 3:15, 11 Mehefin 2013

Clause 73 makes changes to block tax-avoidance schemes involving stock lending arrangements, as the hon. Lady points out. Those schemes claim to exploit a weakness in the current legislation; blocking them will lead to greater fairness by ensuring that everyone involved in stock lending pays their fair share of tax.

I will briefly set out some background to the clause. Manufactured payments arise as a normal part of the financial system, where a company lends shares or other securities to another company. If a dividend is paid on the shares when the shares are out on loan, the borrower of the shares is generally required to pay a manufactured payment representing the dividend to the stock lender. That payment will be taxed where it arises as part of a financial trade.

There are anti-avoidance provisions in the tax legislation to prevent companies and individuals avoiding this tax charge by paying the manufactured payments to someone  other than the lender, then receiving a payment from that other person in a non-taxable form, for example, a loan write-off within a group of companies.

The schemes blocked by the clause involve paying just part of the manufactured payment in a non-taxable form rather than all of it. It is claimed that that circumvents the legislation. While we do not accept that those schemes achieve the tax-avoidance effect that they claim, the clause will put it beyond doubt that the manufactured payment is taxable however it is made.

The changes made by clause 73 will ensure that the company that receives manufactured payments is taxed on them in whatever form they are paid. For example, if a company benefits by having an outstanding loan written off, that will lead to a tax charge, as they have received manufactured payment. Similar changes are being made to the equivalent income tax provisions.

The hon. Member for Newcastle upon Tyne North asked how many companies were involved in that avoidance and how much tax was lost. HMRC is aware of one company using the scheme. It was first identified in 2011, so it has been used over the past couple of years. Tax loss from the scheme was £50 million a year. It is important to take action promptly as the scheme could have been used by any company involved in financial trading, so there is a risk of that becoming more widely used. Hence, clause 73 would close down an avoidance scheme and bring certainty to companies and individuals involved in manufactured payments for genuine reasons.

Question put and agreed to.

Clause 73 accordingly ordered to stand part of the Bill.