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?