CFM17530 - Repos: FA 2007 rules for companies: creditor 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 “creditor repo” (Paragraph 7 Schedule 13 FA 2007)

A “creditor repo” is a repo from the point of view of the lender, the company that purchases securities as collateral. The cash that this company pays, although legally a purchase price, equates in substance to a loan. Commercially, a repo from the point of view of the cash lender is known as a “reverse repo.”

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

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

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

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

There is an example of a creditor repo at CFM17530a.

“Securities” is defined as UK equities, UK securities or overseas securities (see CFM17508).