The Inland Revenue has acted to bring to an end a loophole which it says is being used for tax evasion.

Legislation to close the loophole - in the next Finance Bill - will apply from 7 November 2003. The legislation covers individuals in respect of dividends received and manufactured dividends paid on or after 7 November.

The changes relate to the rules for taxing UK dividends received and making equivalent 'manufactured payments' under a repo or stock loan.

They will ensure that a tax deduction for a manufactured dividend may only be set against a corresponding taxable dividend receipt, and there will be no income tax treated as paid on any dividend received under the arrangement.

Manufactured payments arise typically during a stock loan or repo where the person currently holding the securities receives an interest or dividend payment, but has agreed as part of the deal to pay on an equivalent amount to the original owner.

Current legislation allows an individual to deduct manufactured dividends on UK shares from their total income for tax purposes, but only provided that the payment is matched by an equal taxable receipt.