CFM17514 - Repos: FA 2007 rules for companies: first tax consequence for debtor repos and debtor quasi-repos
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
Debtor repos and debtor quasi-repos: first tax consequence (Paragraph 4 Schedule 13 FA 2007)
The first of two tax consequences for debtor repos and debtor
quasi-repos is that the borrower is taxed in respect of any income
arising on the securities during the period while the arrangement
is in force, as if it held the securities that are initially sold.
This is provided that the income is recognised in determining the
borrower’s profit or loss (whether for that or for any other
period) in accordance with GAAP.
Under paragraph 14(8) Schedule 13 FA 2007, an amount is
“recognised in determining a company’s profit or
loss” if it is recognised for accounting purposes:
- in its profit and loss account or income statement;
- in its statement of recognised gains and losses or statement of
changes in equity; or
- in any other statement of items brought into account in
calculating its profits and losses.
If accounts have not been drawn up in accordance with GAAP, they
are treated as if they had been (see
CFM17508, last paragraph).
Paragraph 14(8) applies to all references in Schedule 13 to
“recognised in determining a company’s profit or
loss”, not just to the reference in paragraph 4.
Timing
Timing for tax purposes should follow the accounting, which
treats the borrower as if there had been no disposal of either the
securities or the income (FRS 5 and, with effect from 1 January
2007 for many companies, IAS 39).
The exception to this is where the real income would have
been taxable on a receipts basis (for instance an overseas equity
dividend received by an investment company). In those cases the
income is taxable in the period in which it would have been
received (which may not be the same as the period in which it
accrues for accounting purposes).
These principles also apply in cases where, instead of
manufactured payments being made, the repurchase price of the
securities is correspondingly reduced (so that in substance a
manufactured payment is still made). This means that the income is
received earlier than under the previous rules, which deemed a
manufactured payment to be received only when the repo unwound (
CFM17245). The only repos whose
treatment is likely to be changed as a result of the new rules are
those where the securities are equities and the borrower is not a
financial trader, since in other cases timing should already follow
an accounts rather than receipts basis.
No double taxation
To prevent the possibility of double taxation, the receipt of
any manufactured payment that represents the income is ignored for
tax purposes. This effectively reverses the approach of the
previous rules, which taxed manufactured payments (whether deemed
or real).
