CFM17502 – Repos: FA 2007 rules for companies: background

This guidance describes the corporation tax treatment of sale and repurchase arrangements (“repos”) where the initial sale of securities takes place on or after 1 October 2007

Background to legislation introduced by Finance Act 2007

CFM17150+ provides an introduction to the commercial background to repos.

The reasons for introducing the repo legislation for companies that was enacted in Finance Act 2007 were stated in an HMRC Technical Note published on 19 January 2007 as:

Simplification: the current legislation is highly mechanical even though it is intended to tax repos in accordance with their economic and accounting substance as financing transactions. Since its introduction a number of piecemeal changes have been introduced in response to market developments leading to complexity. The new proposals envisage a much simpler accounts-based regime.

Fairness: in recent years there have been a number of artificial arrangements whose object has been to use the current rules to generate artificial tax deductions or produce tax-free profits. It has been suggested that the current rules may not produce the correct tax result even in standard transactions.

Modernisation: the existing rules are out of line with more recent legislation that taxes similar financial instruments in accordance with their treatment under UK generally accepted accounting practice (GAAP). A more flexible accounts-based regime should avoid the need for piecemeal changes in the future.