CFM17508 - Repos: FA 2007 rules for companies: debtor repo definition

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

Definition of “debtor repo” (Paragraph 2 Schedule 13 FA 2007)

A “debtor repo” is a repo from the point of view of the borrower, the company that sells securities as collateral. The cash that this company receives, although legally sales proceeds, equates in substance to a loan.

A company (“the borrower”) has a debtor repo if all of the following conditions are met:

• Condition A: under an arrangement the borrower receives from another person (“the lender”) any money or other asset (“the advance”).
• Condition B: in accordance with GAAP, the accounts of the borrower record for the period in which the advance is received a financial liability in respect of the advance.
• Condition C: under the arrangement the borrower sells any securities to the lender.
• Condition D: the arrangement provides that the borrower will or may become entitled or obliged subsequently to buy those or similar securities.
• Condition E: in accordance with GAAP, the subsequent buying of the securities would extinguish the financial liability in respect of the advance that has been recorded in the borrower’s accounts.

A company also has a debtor repo if it is a member of a partnership that meets these conditions.

These conditions cover normal repos executed under standard market documentation. However they also go slightly wider: since Condition D does not specify from whom the borrower is entitled or obliged to buy the securities, this can be a person other than the “lender.”

There is an example of a debtor repo at CFM17508a.

“Securities” is defined as UK equities, UK securities or overseas securities (Paragraph 14(1) Schedule 13 FA 2007). These definitions are the same as those in Paragraph 1(1) Schedule 23A ICTA 1988 (manufactured dividends).

In Condition D, securities are similar if they entitle their holders to the same rights against the same persons as to capital, interest and dividends, and to the same remedies for the enforcement of those rights (Paragraph 14(4) Schedule 13 FA 2007). (This definition also applies to the other provisions of Schedule 13 in which the phrase “those or similar securities” appears, such as Condition D of the creditor repo conditions ( CFM17530)).

If accounts have not been drawn up in accordance with GAAP, Paragraph 14(11) Schedule 13 FA 2007 provides that they will be treated as if they had been. This rule applies throughout Schedule 13, not only for the purposes of the debtor repo conditions.