CFM17528c - Repos: FA 2007 rules for companies:
debtor repo (net- 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: Debtor repo – income arises on securities during
term of repo, no manufactured payment made
(“net-paying” transaction)
(This transaction differs from the example in
CFM17508a because the repurchase price
is 93, not 103. However payment of that repurchase price
extinguishes A’s financial liability in respect of the
advance (Condition E of the debtor repo conditions), so A has a
debtor repo in this case.)
Transaction
- 1/1/09: A (borrower) sells securities to C
(lender) for 100.
- 31/5/09: Securities pay income of 10 to C
(dividend if equities, interest if debt securities).
- 30/6/09: A repurchases the same or similar
securities from C for 93. This includes a finance charge of 3 (in
practice the charge would be less than 3 because from 31/5-30/6/09
the advance is 90, not 100).
| A’s accounting entries, in accordance with
GAAP |
| 1/1/09 (receipt of advance): | Dr Cash 100; Cr Financial Liability 100 |
| 1/1/09-30/6/09 (repo “interest”
accrual): | Dr P&L 3; Cr Financial Liability 3 |
| 31/5/09 (real dividend/ interest paid to C, no
manufactured payment received by A) | Dr Financial Liability 10; Cr Dividend/Interest
accrual 10 |
| 30/6/09 (repayment of advance) | Dr Financial Liability 93; Cr Cash 93 |
| Net Profit and Loss result: | Credit 10: income on securities |
| | Credit 10: income on securities |
Tax Treatment of A
A’s tax treatment is the same as under the
“gross-paying” transaction (
CFM17528b), namely:
A is treated as receiving the real income of 10 on 31/5/09 (
CFM17514). The treatment of this income
will depend on whether A is a financial trader, and on the type of
income. A’s finance charge of 3 is treated as interest for
loan relationships purposes (
CFM17524).
Further points to note
- If the securities are overseas equities,
A’s entitlement to DTR is based on the tax deducted from the
deemed manufactured overseas dividend received, not on the tax
deducted from the real dividend (
CFM17516).
- This transaction corresponds to the
creditor repo example at
CFM17550c (where C is a company).
- A’s tax treatment would be the same
if, instead of repurchasing the securities from C, A purchased them
from another person (“D”). In such a transaction both C
and D (if they are companies) would have creditor
quasi-repos.
CFM17550d gives examples of creditor
quasi-repos.
