CFM17528a - Repos: FA 2007 rules for companies: debtor repo (no income) example
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
Example: Debtor repo – no income arises on securities during term of repo
(
CFM17508a explains why A has a debtor
repo in this case.)
Transaction
As in
CFM17508a
- 1/1/09: A (borrower) sells securities to C (lender) for 100.
- 30/6/09: A repurchases the same or similar securities from C for 103. This includes a finance charge of 3 (6 months at 6% per annum).
| A’s accounting entries, in accordance with
GAAP
In addition to the entries at CFM17508a: |
|
| 1/1/09-30/6/09 (repo “interest”
accrual):
| Dr P&L 3; Cr Financial Liability 3 (the financial liability which has increased to 103 is reduced to nil by the payment of the repurchase price on 30/6/09) |
| Net Profit and Loss result: | Debit 3: “interest” |
Tax Treatment of A
A’s finance charge of 3 is treated as interest for loan
relationships purposes (
CFM17524).
Further points to note
This transaction corresponds to the creditor repo example at
CFM17550a (where C is a company).
A’s tax treatment would be the same if, instead of
repurchasing the securities from C, A purchased them from another
person (“D”). Such a transaction corresponds to the
creditor
quasi-repo examples at
CFM17550d (where C and D are
companies).
