CFM17548 - Repos: FA 2007 rules for companies: “quasi-interest” avoidance schemes

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

“Quasi-interest” avoidance schemes (Paragraph 12 Schedule 13 FA 2007)

This anti-avoidance provision is aimed at schemes designed to produce non-taxable interest-like returns using arrangements similar to creditor repos and creditor quasi-repos.

The provision applies if all of the following conditions are met:

• Under an arrangement a person (not necessarily a company) receives any money or other asset (“the advance”) from a company (or a partnership of which the company is a member).
• The company does not have a creditor repo or creditor quasi-repo by reference to the arrangement but would have one on “the applicable accounting assumption,” and if Condition E of the creditor repo and creditor quasi-repo conditions were read in the light of that assumption.

“The applicable accounting assumption” is the assumption that, in accordance with GAAP, the accounts of the company (or partnership of which it is a member) for the period in which the advance is made record a financial asset in respect of the advance.

“Reading Condition E of the creditor repo and creditor quasi-repo conditions in the light of the applicable accounting assumption” means that if a financial asset had been recorded in respect of the advance, it would be extinguished by transactions of the type described in Condition E for a creditor repo ( CFM17530) or Condition E for a creditor quasi-repo ( CFM17534).

• The arrangement is designed to produce a return (“quasi-interest”) which equates in substance to the return on an investment of money at interest.
• The main purpose or one of the main purposes of the arrangement is the obtaining of a tax advantage. “Tax advantage” is defined in paragraph 14(1) Schedule 13 FA 2007 as having the same meaning as in section 840ZA ICTA 1988.

If these conditions are met, paragraph 10 Schedule 13 FA 2007 has effect as if the company had a creditor repo, and as if the quasi-interest were an amount deemed to be interest under that provision ( CFM17544).

This rule is unlikely to be relevant where the purchase and sale of the shares is taken into account in computing the lender’s profits in accordance with Case I or Case II of Schedule D, because there is unlikely then to be any tax advantage. Similarly the rule will not apply where the interest-like return is taxable as income under any other provision (such as sections 91A-G FA 1996), since in that case no tax advantage can arise.