New repo legislation for companies

Schedule 13 to Finance Act 2007 contains a new regime for the charge to corporation tax of sale and repurchase agreements (repos) entered into by companies. Schedule 14 to the Act makes a number of consequential changes to primary legislation.

The new regime was developed in consultation with business and other interested parties following publication on 19 January 2007 of draft legislation and an open day held on 2 February attended by practitioners and HMRC and Treasury officials. The legislation included in the Finance Act reflects the constructive comments and feedback arising from this process. However, the Government decided that the legislation would not come into force immediately so that business could make any final responses to the legislation published in the Finance Bill.

In the event no significant representations were received following publication of the Finance Bill. When the legislation was debated at Committee Stage on 22 May, the Economic Secretary to the Treasury announced that the Government intended that the legislation should have effect from 1 October 2007 unless compelling reasons were given why its introduction should be delayed. This remains the Government’s intention.

As well as the consequential changes to primary legislation, the new regime requires a number of changes to be made to secondary legislation relating to repo arrangements. In addition, in recent years it has become apparent that certain regulations dealing with manufactured payments are either uncertain in their operation or possibly lead to anomalous results. Accordingly, 6 draft Statutory Instruments have been produced that aim to ensure that the new repo regime operates correctly and to clarify and modify the relevant manufactured payment rules.

The draft Instruments are attached as links to this document and are summarised below.

  1. The draft Finance Act 2007 (Schedules 13 and 14) Order 2007 (PDF 26K) provides that Schedules 13 and 14 shall have effect in relation to repo arrangements entered into on or after 1 October 2007.
  2. The draft Sale and Repurchase of Securities (Amendment of Instruments) Order 2007 (PDF 34K) makes a number of consequential amendments to existing Instruments dealing with repo transactions and come into effect in relation to repos entered into on or after 1 October 2007.
  3. The draft Sale and Repurchase of Securities (Modifications of Schedule 13 to the Finance Act 2007) Regulations 2007 (PDF 34K) are the replacement for SI1995/3220 for CT purposes and deal with redemption and substitution of securities during repos. They apply in relation to repo arrangements entered into on or after 1 October 2007.
  4. The draft Sale and Repurchase of Securities (Modification of Enactments) Regulations 2007 (PDF 34K) are the IT and CGT equivalent of The Sale and Repurchase of Securities (Modifications of Schedule 13 to the Finance Act 2007) Regulations 2007 .
  5. The draft Income Tax (Manufactured Overseas Dividends) (Amendment) Regulations 2007 (PDF 41K) make a number of amendments to the rules for manufactured overseas dividends in SI1993/2004 and have effect in relation to manufactured payments made or treated as made on or after 1 October 2007. .
  6. The draft Manufactured Interest (Tax) Regulations 2007 (PDF 37K) replace SI1999/992 in relation to manufactured payments made or treated as made on or after 1 October 2007.

The first 4 draft instruments are straightforward or simply replicate current rules. The explanatory comments below accordingly describe only the proposed changes to the rules for manufactured payments.

The draft Income Tax (Manufactured Overseas Dividends) (Amendment) Regulations 2007

New regulation 3(5) inserted by regulation 3(3) ensures that where the recipient of a manufactured overseas dividend (MOD) is a company then the rate of relevant withholding tax (RWT) for which the payer (primary charge) or recipient of the MOD (reverse charge) will be liable to account is the highest rate of withholding which would have applied had the dividend of which the MOD is representative been paid to a UK company. This ensures that where a double taxation agreement or domestic law provides for a different (generally a lower) rate of withholding for companies than for individuals then the RWT for corporate recipients will be based on the rate applicable to companies.

Regulation 3(6) ensures that where the recipient of the MOD is a registered pension scheme or the MOD is linked solely to pension business for the purposes of section 438 of the Taxes Act* then the rate of RWT will be the rate which would applied in relation to the real dividend of which the MOD is representative paid to that recipient. Thus, if the relevant double taxation agreement or domestic law would have allowed for gross payment to that recipient then there will be no primary or reverse charge in relation to the corresponding MOD paid to the scheme.

(* The reference to pension business for section 438 purposes is still to be added.)

Draft Regulation 5A extends this treatment to cases where chains of payments are routed through Authorised UK Intermediaries (AUKIs) or Authorised UK Collecting Agents (AUKCAs) provided that the end recipient is a relevant pension arrangement. It is based on regulation 5(2) of SI1993/2004 which allows for gross payment of MODs where the final payment in the chain is made to a non-UK recipient.

Regulations 5A(2) to (5) set out the conditions for this treatment to apply. The initial MOD in the chain may be made by any person provided that the recipient is an AUKI or AUKCA. The AUKI or AUKCA must issue a notice (based on the Appendix C notice) to the payer authorising gross payment. The final payment must be made to a relevant pension arrangement.

New regulation 7(3A) to (3C) ensure that in a case to which regulation 7(2)(e) of SI1993/2004 applies the UK recipient of the MOD will be entitled to double taxation relief in respect of the smaller of:

  1. the overseas tax suffered by the dividend manufacturer in respect of the real overseas dividend and
  2. the excess of the gross amount of the real overseas dividend received by the dividend manufacturer over the amount of the MOD representing that dividend paid by the dividend manufacturer.

The draft Manufactured Interest (Tax) Regulations 2007

These provide that where the relevant conditions are met then the UK company recipient of a payment of manufactured interest that represents interest on a UK debt security will obtain tax credit for any tax withheld on payment of the real interest to the non-UK interest manufacturer.

Regulation 1 is mainly definitional. Regulation 1(3) provides that where the manufactured interest payment arises under a repo arrangement within Schedule 13 to Finance 2007, then the fiction in paragraph 4(3) of that Schedule that the borrower under a debtor repo is treated as not receiving any manufactured payment does not apply for the purpose of the regulations.

Regulation 2 contains the conditions for the recipient of the manufactured interest to be entitled to the tax credit and defines the amount of the credit. The recipient must show that the interest manufacturer received the real interest of which the manufactured payment is representative. The credit will be the lower of the tax actually withheld in respect of the real interest and the excess of the gross amount of the real interest received by the interest manufacturer over the amount of the manufactured payment representing that interest made by the interest manufacturer. References to manufactured interest payments do not include payments treated as made under section 736B or (in relation to old repo arrangements) section 737A of ICTA.

Any queries in relation to the draft regulations or the new repo legislation should be made either to:

Richard Rogers
3rd Floor
100 Parliament Street
London
SW1A 2BQ

020 7147 2625

Email: Richard Rogers

Geoff Heaton
3rd Floor
100 Pariament Street
London
SW1A 2BQ

020 7147 2577

Email: Geoff Heaton