CFM17524 - Repos: FA 2007 rules for companies: second tax consequence – relief for finance charge

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

Second tax consequence: relief for borrower’s finance charge

Any amount that, in accordance with GAAP, is recorded in the accounts of the borrower (or, if the borrower is a member of a partnership that receives the advance, in the accounts of the partnership) as a finance charge in respect of the advance is treated as interest for the purposes of

• the loan relationship rules, and
• Part 15 of the Income Tax Act 2007 (deduction of income tax). CFM17295 considers the circumstances where repo interest may be annual and hence be required to be paid under deduction of tax.

The deemed interest is treated as paid when “the relevant repurchase” takes place or when it becomes apparent that that repurchase will not take place. “The relevant repurchase” means the subsequent buying by the borrower of the securities or (in the case of a debtor quasi-repo) the subsequent receipt of the money or other asset from (or discharge of the liability to) the borrower. The date on which the interest is treated as paid establishes when tax should be deducted (where relevant), and when relief is given for loan relationship purposes in cases to which paragraph 2 Schedule 9 FA 1996 applies (see the following paragraph).

Paragraph 5(2) (b) Schedule 13 FA 2007 identifies the lender for the purposes of the loan relationship rules as the person who initially sells the securities. This enables the special computational rules in s87 FA 1996 and Schedule 9 FA 1996, which apply where there is a connection between borrower and lender, to apply appropriately to the deemed loan relationship. For instance, if

• a borrower has a debtor repo in an accounting period, and is connected with the lender; and
• the lender is outside the loan relationships regime; and
• the interest is not paid (i.e. the securities are not repurchased) within 12 months of the end of the AP in which the accrual is made for it in the borrower’s accounts,

relief will be given for the deemed interest when it is paid (i.e. when the shares are repurchased), not as it accrues in the borrower’s accounts (the paragraph 2 Schedule 9 FA 1996 “interest long stop”: see CFM5600+)