CFM17550d - Repos: FA 2007 rules for companies: creditor quasi-repo examples

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 quasi-repos

( CFM17534a explains why both C and D have a creditor quasi-repo in this case.)

Transaction

As in CFM17534a:


  • 1/1/09: A sells securities to C for 100.
  • 30/4/09: C novates its rights and obligations under the repo to D (also a lender), for which it receives 102 from D. This represents the advance of 100 made by C, plus a finance return of 2 (4 months at 6% per annum).
  • 30/6/09: A purchases the same or similar securities from D for 103. This includes a further finance return of 1 (2 months at 6% per annum).

Treatment of C

Accounting entries, in accordance with GAAP

In addition to the entries at CFM17534a:
1/1/09-30/4/09 (repo “interest” accrual):



Dr Financial Asset 2; Cr P&L 2 (the financial asset which has increased to 102 is reduced to nil by receipt of the novation payment on 30/4/09)
Net Profit and Loss result:Credit 2: “interest”


Tax Treatment

C’s finance return of 2 is treated as interest for loan relationships purposes ( CFM17544).

Treatment of D

Accounting entries, in accordance with GAAP

In addition to the entries at CFM17534a:
30/4-30/6/09 (repo “interest” accrual):



Dr Financial Asset 1; Cr P&L 1 (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 1: “interest”


Tax Treatment

D’s finance return of 1 is treated as interest for loan relationships purposes ( CFM17544).

Further point to note

This transaction corresponds to the debtor repo example referred to in the footnote to CFM17528a (if A is a company).

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