CFM17235 - Repos: taxation: taxing the net paying repo

This guidance describes the treatment of repos for income tax and capital gains tax purposes, and for corporation tax purposes where the original owner transfers the securities to the interim holder before 1 October 2007

How a net paying repo is taxed

As the example at CFM17190a shows, the standard repo ( CFM17185) and net paying repo ( CFM17190) are economically identical, so it is desirable that the tax consequences should also be the same. But because section 730A and ITA07/S607-S611 work on cash flows and the cash flows under the net paying repo are different, special rules are needed to achieve this. These rules are in section 737A and section 737C of ICTA88 which are re-written for income tax purposes, for 2007-08 and later tax years, in Chapter 4 of Part 11 of ITA07.

These rules have two effects:

Firstly, where the relevant conditions CFM17245 are met, section 737A (5) (or ITA07/S602 (1)) provides that the relevant person (normally the interim holder) is deemed to have made a manufactured payment to the original owner. This payment is treated for both parties in the same way as would be a real manufactured payment on the same securities, see CFM17320.

Secondly, where section 737A (5) or ITA07/S602 (1) applies, section 737C or ITA07/S604 deem the repurchase price of the securities to be increased by the amount of the section 737A (ITA07/S602) payment for the purpose of applying the price differential rule in section 730A (or ITA07/S607). So where the conditions in section 737A (or ITA07/S601) are satisfied the real transaction is used as a framework for constructing a deemed one. Then tax is charged by reference to the deemed transaction rather than the real one.

The object of section 737A and 737C (now Chapter 4, Part 11 ITA07) is to convert the net paying repo into a gross paying one so as to place both original owner and interim holder in the same tax position as if manufactured payments had been made and the lending return delivered purely by price differential. The provisions also ensure that the normal rules relating to deduction of tax on manufactured payments cannot be avoided by entering into net paying repos.