REV BN 17: Sale & Repurchase Agreements: Anti-Avoidance
Who is likely to be affected?
1. Financial institutions that undertake sale and repurchase (repo) agreements.
General description of the measure
2. The changes are primarily anti-avoidance measures. They tackle contrived repo transactions that create artificially increased deductions for tax purposes, or that reduce the amount of taxable receipts. They also clarify some uncertainties in the legislation to give greater certainty about its application.
Operative date
3. The changes apply to repo deals agreed on or after 9th April 2003, apart from one change which applies to manufactured payments deemed to be made on or after 9th April 2003.
Current law and proposed revisions
4. Repo agreements are used extensively in the financial markets as a form of secured lending, or to provide a source of stock to meet short positions.
5. At present, the tax rules for repo encompass some transactions but not others; and some repo transactions are subject to some, but not all, of the repo tax rules. This has led to perceived gaps and mismatches in the rules, which could be exploited for avoidance.
6. The changes ensure that, generally, where a transaction is treated as a repo for tax purposes all the repo tax provisions apply; and that where some repo rules are dis-applied then all such rules are dis-applied.
7. A new provision is introduced in order to provide a clear scheme for dealing with foreign exchange gains and losses arising on the original sale price in a repo.
8. The changes also clarify anti-avoidance rules which counter schemes where there is no provision for a manufactured payment between the two parties, and the repo seller allows the repo buyer simply to retain the dividend paid on shares as his return on the deal. These schemes effectively convert taxable interest into a non-taxable dividend. The changes will clarify that the rules also apply where the repo buyer receives a manufactured dividend rather than a real dividend.
9. These changes also remove an unintended effect from the abolition of Advance Corporation Tax (ACT), where a deduction for a deemed manufactured payment could be increased by an amount equal to what would have been the dividend tax credit.
Further advice
10. If you have any questions about this change, please contact the Public Enquiry Unit on 020 7438 6420 to 6425.
| Home | ||||
