CFM17550b - Repos: FA 2007 rules for companies: creditor 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: Creditor repo – income arises on securities during term of repo, manufactured payment made (“gross-paying” transaction)

( CFM17530a explains why A has a debtor repo in this case.)

Transaction

As in CFM17530a/ CFM17550a:


  • 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 return of 3.

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.
C’s accounting entries, in accordance with GAAP

In addition to the entries at CFM17530a:
31/5/09 (real dividend/ interest paid to C)Dr Cash 10; Cr Financial Asset 10
31/5/09 (manufactured payment made to A)Dr Financial Asset 10; Cr Cash 10
1/1/09-30/6/09 (repo “interest” accrual):



Dr Financial Asset 3; Cr P&L 3 (the financial asset which has increased to 103 is reduced to nil by receipt of the repurchase price on 30/6/09)
Net Profit and Loss result:Credit 3: “interest”


Tax Treatment of C


As in the example at CFM17550a, C’s finance return of 3 is treated as interest for loan relationships purposes ( CFM17544). C’s receipt of the real income and making of the manufactured payment are both disregarded for CT purposes ( CFM17536). Deduction of tax: C is deemed to make a manufactured payment to A and, depending on the nature of the security and the status of the borrower, may be required to deduct tax (the manufactured payment itself is ignored for tax deduction purposes). See CFM17552. Further points to note


  • This transaction corresponds to the debtor repo example at CFM17528b (where A is a company).
  • C’s tax treatment would be the same if, instead of selling the securities to A, C sold them to another person (“B”). In such a transaction both A and B (if they are companies) would have debtor quasi-repos. There are examples of debtor quasi- repos at CFM17528d.