CFM17528b - Repos: FA 2007 rules for companies:
debtor repo (gross- paying) 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 – income arises on securities during
term of repo, manufactured payment made (“gross-paying”
transaction)
(
CFM17508a explains why A has a debtor
repo in this case.)
Transaction
As in
CFM17508a/
CFM17528a
- 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).
In addition:
- 31/5/09: Securities pay income of 10 to C
(dividend if equities, interest if debt securities).
- 31/5/09: C makes manufactured payment of
10 to A.
A’s accounting entries, in accordance with
GAAP
In addition to the entries at
CFM17508a: |
| 31/5/09 (real dividend/ interest paid to C,
manufactured payment received by A) | Dr Cash 10; Cr Dividend/Interest accrual 10 |
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: | Credit 10: income on securities |
| | Debit 3: “interest” |
Tax Treatment of A
A is treated as receiving the real income of 10 on 31/5/09 (
CFM17514). The treatment of this income
will depend on whether A is a financial trader, and on the type of
security As in the example at
CFM17528a, A’s finance charge of
3 is treated as interest for loan relationships purposes (
CFM17524).
Further points to note
- If the securities are overseas equities,
A’s entitlement to DTR is based on the tax deducted from the
manufactured overseas dividend received, not on the tax deducted
from the real dividend (
CFM17516).
- This transaction corresponds to the
creditor repo example at
CFM17550b (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”). In such a transaction both C
and D (if they are companies) would have creditor
quasi-repos.
CFM17550d gives examples of creditor
quasi-repos.
