CFM17245 - Repos: taxation: section 737A ICTA88 and S602 ITA07- detailed rules

This guidance describes the treatment of repos for income tax and capital gains tax purposes, and for corporation tax purposes where the original owner transfers the securities to the interim holder before 1 October 2007

Applying the detailed rules

Where section 737A or as the case may be, ITA07/S602 applies the dividend manufacturing rules deem the “relevant person” to make a manufactured payment. The relevant person is the person from whom the securities are bought back. Section 737A or ITA07/S602 apply where:

• a person has sold securities to another person, and
• under the same or any related agreement ( CFM17210) the transferor or a person connected with him is required to buy them back or exercises an option to buy them back.

The section does not apply unless the conditions in 737A (2) or ITA07/S602 (1) are satisfied. These are that:

• as a result of the transaction a dividend which becomes payable in respect of the securities is receivable otherwise than by the transferor,
• there is no requirement under the agreement for a person to pay to the transferor an amount representative of the dividend on or before the date when the repurchase price of the securities become due, and
• it is reasonable to assume that the repurchase price was arrived at taking into account the fact that the dividend is receivable otherwise than by the transferor.

Where section 737A or ITA07/S602 applies the dividend manufacturing rules apply as if the relevant person had paid a manufactured payment equal to the income receivable otherwise than by the transferor on the date that the repurchase price of the securities became due (section 737A(5) or ITA07/S602 (1)).

Section 737A or ITA07/S602also applies where the conditions in section 737A (2A) or ITA07/S601 (3) are satisfied. This is an anti-avoidance provision that is expected to apply only rarely in practice.

Taxpayers within the charge to income tax

• As originally enacted, section 602(1) (b) ITA (like section 737A ICTA before it) treated a deemed payment as having been made when the repurchase price for the securities became due.
• Paragraph 22 Schedule 14 FA 2007 amends section 602(1) (b). The effect is that for repos entered into by income tax-payers where the original owner transfers the securities to the interim holder on or after 1 October 2007, the deemed payment is treated as having been made on the same date on which the real income is payable. This ensures that where one party to a repo is a company and the other is an income tax-payer, tax is deducted from a manufactured payment at the same time that any credit for the tax is given. See CFM17552.