CFM17550c - Repos: FA 2007 rules for companies: creditor 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: Creditor repo – income arises on securities during term of repo, no manufactured payment made (“net-paying” transaction)
(This transaction differs from
CFM17530a because the repurchase price
is 93, not 103. However receipt of that repurchase price
extinguishes C’s financial asset in respect of the advance
(Condition E of the creditor repo conditions), so C has a creditor
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 return of 3 (in practice the return would be less than 3 because from 31/5-30/6/09 the advance is 90, not 100).
| C’s accounting entries, in accordance with GAAP | |
| 1/1/09 (receipt of advance): | Dr Financial Asset 100; Cr Cash 100 |
| 31/5/09 (real dividend/interest paid to C): | Dr Cash 10; Cr Financial Asset 10 |
| 1/1/09-30/6/09 (repo “interest” accrual): | Dr Financial Asset 3; Cr P&L 3 |
| 30/6/09 (repayment of advance): | Dr Cash; 93 Cr Financial Asset 93 |
| Net Profit and Loss result: | Credit 3: “interest” |
Tax Treatment of C
C’s finance return of 3 is treated as interest for loan
relationships purposes (
CFM17530). C’s receipt of the real
income is 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. See
CFM17552. Further points to note
- The transaction is a debtor repo for A (if A is a company). The example at CFM17528c looks at this transaction from the point of view of the debtor.
- C’s tax treatment would be the same if, instead of selling the securities to A, C sold them to another person (“B”). Such a transaction would be a debtor quasi-repo for both A and B (if A and B are companies). There are examples of debtor quasi- repos at CFM17528d.
