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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: computational rules: company ceasing to be party to a loan relationship: repos and stock lending

Company ceasing to be party to a loan relationship: repos and stock lending

Repos and stock lending are financing arrangements that involve the sale or transfer of securities as security for a loan. The original owner of the securities sells or lends them to another party (the interim holder) for cash. The securities are sold or transferred back at a later date. In effect, the arrangements are a form of secured loan. Generally accepted accounting practice may require the original owner to continue to account for the securities, even where the legal ownership has passed to another party (and hence the original owner has ceased to be party to a loan relationship).

CFM46000+ has more on the special tax rules that apply to repos and CFM74100+ explains stock lending.

CTA09/S332 applies where a company has ceased to be party to a loan relationship under a repo, stock lending or similar arrangement, but, in accordance with GAAP, continues to recognise amounts in respect of that relationship in determining its profit or loss. Such amounts are to be brought into account in accordance with the loan relationships rules.

There are two circumstances where the conditions for CTA09/S332 are met, whose treatment is prescribed by other provisions.

  • One is a borrower in a ‘debtor repo’ or ‘debtor quasi-repo’ where income arises on the securities during the period of the arrangement, where the treatment of the borrower is prescribed by CTA09/S550 (CFM46380).
  • The other is where the profit or loss on the disposal of a loan relationship is not fully recognised in the accounts when the company ceases to be a party to the loan relationship (for instance because the amounts of deferred consideration realised differ from the initial amounts recognised on disposal of the loan relationship), and credits or debits are brought into account in accounting periods after the company ceases to be a party to the relationship. The treatment of such amounts is prescribed by CTA09/S331 (CFM33280).

To prevent the possibility of double taxation, S332 does not apply to amounts brought into account under S550 or S331.

Transactions before 1 October 2007

The treatment of such arrangements coming into force before 1 October 2007 was prescribed by FA96/SCH 9/PARA15, which provided that

  • Disposals or acquisitions of debt securities made in pursuance of stock lending arrangements or repo arrangements were not ‘related transactions’ for the purposes of the loan relationships legislation. This statutorily prevented tax profits or losses from arising on such transfers.
  • Discharges or redemptions of securities during the period of a loan were treated as related transactions, and any debits or credits were taxable.

Paragraph 15 did not apply to any disposal or acquisition of the securities made by the stock borrower during the period of the loan.

Since accounts prepared in accordance with GAAP should not reflect any profits or losses on such transfers, the previous rule under paragraph 15 it was not reproduced in CTA09/S332.