CFM17538 - Repos: FA 2007 rules for companies: qualifications to the first tax consequence for creditor repos and creditor 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

Creditor repos and creditor quasi-repos: first tax consequence (continued)

There are two qualifications to the rule (see CFM17536) that a lender in a creditor repo or creditor quasi-repo is taxed, in respect of its income arising while the arrangement is in force, as if it did not hold the securities that are initially sold, and did not make any manufactured payments in respect of those securities.

First qualification

An amount of income is not to be ignored for CT purposes if, in accordance with GAAP, it is recognised in determining the lender’s profit or loss or is taken into account in calculating the amounts which are so recognised (for the meaning of “recognised in determining… profit or loss,” see CFM17514).

The purpose of this qualification is to ensure that in cases where the lender’s overall accounting return from the repo takes into account income arising on the securities (for instance, because there is no requirement on the lender to make any manufactured payments but there is an equivalent reduction in the repurchase price) then that will be respected for tax purposes. But it would also apply where, exceptionally, the income is recognised in the lender’s profit and loss account or similar accounting statement.

Second qualification

A manufactured payment is not to be ignored for CT purposes if, in accordance with GAAP, it is recognised in determining the lender’s profit or loss (for the meaning of “recognised in determining… profit or loss,” see CFM17514). For instance, it is possible that a payment made by a lender who has repoed in a security to cover a short sale (and therefore does not receive the real income) may be so recognised.

This qualification is in turn subject to other provisions that may restrict the deductibility of manufactured payments (for instance, paragraphs 2 and 7A of Schedule 23A to ICTA (manufactured payments in respect of UK equities; manufactured payments for unallowable purposes)).

If exceptionally a financial trader with a net-paying creditor repo records in accordance with GAAP a profit and loss debit that corresponds to income arising on the securities (for instance, because it has repoed in the security to cover a short sale), normal Case I principles will apply to the debit.