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Legislation will be introduced in the next Finance Bill to prevent a recent High Court decision from affecting the tax treatment of real payments of manufactured interest, the financial secretary to the Treasury, Stephen Timms, has announced.
The new rules will ensure that tax treatment follows that of the payments in company accounts prepared in accordance with generally accepted accounting practice.
The recent High Court case DCC Holdings (UK) Ltd v HMRC [2008] EWHC 2429 concerned the tax treatment of deemed manufactured payments, but the ruling cast doubt on the tax treatment of real manufactured payments for both payers and recipients.
Payers could be able to claim additional deductions for tax purposes that bear no relation to their economic position, while recipients may be taxable on amounts in excess of their actual income.
Before the DCC Holdings judgment, the tax treatment of real payments of manufactured interest had never been questioned.
To ensure the court's decision does not have adverse consequences either for the Exchequer or for taxpayers, the mooted legislation will apply to past payments relating to open accounting periods, as well as to payments made on or after 27 January 2009, and it will ensure that existing practice is followed.
The new rules will not apply to deemed manufactured interest treated as paid before 27 January; only to payments made on or after the date.
