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CLAUSE 82: STOCK
LENDING ANTI-AVOIDANCE
SUMMARY
1.
This Clause amends existing anti-avoidance legislation concerning
stock lending. It prevents a borrower of securities obtaining a tax
deduction for a payment representing interest or dividends where the
borrower does not incur actual expenditure on such a payment. The
amendment also ensures that the borrower cannot surrender the amount
as group relief. It applies in relation to interest or dividends arising
on the borrowed securities on or after 3 October 2000.
DETAILS OF THE CLAUSE
2.
Subsection (1) provides for section 736B ICTA 1988 to be
amended.
3.
Subsections (2) and (3) insert a new subsection (2A) into section
736B. This new subsection ensures that a stock borrower cannot obtain
a tax deduction for any payment section 736B deems it to make for
the purpose of Schedule 23A ICTA 1988, and cannot surrender the deemed
payment as group relief.
4.
Subsection (4) applies the rule to payments that are deemed
to be made on or after 3rd October 2000.
BACKGROUND
NOTE
6.
A stock lending arrangement is an arrangement for the transfer of
securities other than by way of sale where there is a requirement
for the securities to be transferred back at a future time, also other
than by way of sale.
7.
The financial markets commonly use stock lending arrangements to enable
orderly dealings in equities, bonds and Government stocks, and to
provide credit support. Standard arrangements provide that if securities
on loan pay a dividend or interest, then the borrower has to ‘manufacture’
a payment representing that dividend or interest back to the person
who lent the stock. This ensures that the economic benefits and risks
of owning the securities stay with the lender of the stock.
8.
Schedule 23A ICTA 1988 provides rules for taxing and relieving manufactured
payments. A recipient of manufactured payments is taxed as if it had
received real dividends or interest. In some circumstances the payer
may have to withhold tax on payment.
9.
Prior to 1997 Inland Revenue approval was required for stock lending
arrangements. Approval was only given for arrangements where the borrower
contracted to make manufactured payments. But in 1997 the approvals
regime was abolished.
10.
It was foreseen at the time that stock lending arrangements without
provision for manufactured payments might be used to transfer taxable
income to non-taxpayers, or to avoid deduction of tax from a manufactured
payment. To prevent this abuse, legislation was introduced (in what
is now Section 736B ICTA) to deem manufactured payments to be made
for tax purposes if the agreement did not require them. The payments
are deemed to be made on the same day as the real dividend or interest
is paid, and the lender is taxed on them in the same way as on real
dividends or interest.
11.
Following this legislation, schemes have been promoted to contrive
stock borrowing transactions without provision for manufactured payments.
The stock borrower would be a payer of UK tax, but the lender would
be chosen so that it would not suffer tax (or at least an immediate
or effective tax liability) on its deemed receipt. The objective is
to ensure that the borrower obtains a deduction for the deemed payment
arising under section 736B. It shares its consequent tax saving -
unmatched by actual expenditure - with the lender by way of a fee
payment.
12.
This clause blocks this abuse by removing the availability of a tax
deduction for the deemed payment. It will not affect standard market
contracts, which invariably require the borrower to make actual payments
to the lender.
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