CFM17518 - Repos: FA 2007 rules for companies: “Relevant arrangements”

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

“Relevant arrangements” (Paragraph 4(1) (b) and (2) Schedule 13 FA 2007)

An anti-avoidance rule means that Paragraph 4 also applies (so that a company is taxed on income as if it had held the securities) where the company has entered into a “relevant arrangement.”

A “relevant arrangement” is one where

• A company sells securities and is entitled or obliged to buy them back (or the company sells securities and another person is entitled or obliged to buy them, or another person sells securities and the company is entitled or obliged to buy them); and
• The main purpose or one of the main purposes is to obtain a tax advantage. “Tax advantage” is defined at FA07/SCH13/PARA14 (1) as having the same meaning as in ICTA88/S840ZA.

This rule is to prevent bondwashing in cases where a company sells to a creditor securities that are about to pay a dividend, with the intention that the income transferred to the creditor will (in whole or part) discharge a liability owed to it by the seller, and that the seller avoids tax on that income.

Example

X Ltd (not a financial trader) owes £1m to Y Inc. It discharges this debt by entering into an arrangement under which it sells a holding of overseas equities to Y Inc shortly before they pay a dividend of £1m (no withholding tax) which it has accrued in its accounts, and buys them back after the dividend has been paid. The transaction is not a financing one and is not accounted for as a repo in X Ltd’s accounts.

The transaction is a relevant arrangement because X Ltd has sold securities and bought them back, and because a main purpose is to obtain a tax advantage, namely the avoidance of tax on the dividend of £1m. X Ltd has received the benefit of this dividend because it has been used to discharge its liability to Y Inc but has not received the dividend itself: since the transaction is not treated as a financing repo in X Ltd’s accounts, the transaction would not be a debtor or quasi debtor repo.

Since X Ltd has discharged its liability under a relevant arrangement, it is taxed as if it had received the real income of £1m.

(Under the previous repo rules, such an arrangement would have been caught by section 737A ICTA (since X Ltd would have been deemed to receive a manufactured payment equivalent to the income alienated under the arrangement). Since section 737A is repealed for arrangements coming into force on or after 1 October 2007 (see CFM17500), the new rule reproduces its effect.)