No commercial purpose

Treatment of manufactured overseas dividends

In his self-assessment tax return for 2005-06 the taxpayer claimed a deduction from his total income of £303 123 for two payments made for loan notes. He claimed that he was entitled to deduct them because they were manufactured overseas dividends (MODs) (TA 1988 Sch 23A para 4(1)) and as such were annual payments within s 349(1) and reg 2B(3) of the Income Tax (Manufactured Overseas Dividend) Regulations SI 1993/2004. The payments had been made as part of an avoidance scheme and had no wider commercial purpose. HMRC disallowed the deduction.

The First-tier Tribunal and Upper Tribunal found for HMRC.

The taxpayer appealed.

In the Court of Appeal Lord Justice Patten said one purpose of the borrower of the overseas securities being able to treat MODs as deductible annual payments under reg 2B(3) was to prevent the borrower being taxed...