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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: manufactured interest and repos: overview

Repos, stock lending and similar transactions

Sale and repurchase agreements (‘repos’) are an important feature of the financial markets. They enable a company to obtain a form of secured loan, using securities it owns as collateral, and they help promote trading in securities. Repos are generally carried out by banks and other financial institutions, but are also entered into by treasury departments of large corporates, both as lenders and borrowers.

In essence repos involve a temporary transfer of the legal ownership of securities, while the economic ownership is retained by the original owner. Interest or dividends received by the temporary owner are passed to the original owner in the form of ‘manufactured payments’.

As these arrangements do not involve the actual lending of money, the loan relationships rules deal with them by deeming them to be loan relationships.

Special tax rules for repos

CFM46100 explains the commercial background to the use of repos.

CFM46200 explains the special corporation tax rules that apply to repos. These rules are set out in CTA09/PT6/CH10 and are a rewrite of FA07/SCH13, which made major changes to the tax rules on repos, where the initial sale of the securities is made on or after 1 October 2007.

Securities disposed of under a repo continue to be taxed under the loan relationships rules

Where a company ceases to be party to a loan relationship by disposing of it under a repo (or a stock lending arrangement), but continues to recognise amounts in respect of the loan relationship in accordance with GAAP, CTA09/S332 requires the company to bring in amounts under the loan relationships rules. CFM33290 explains this in more detail.

Stock lending

Stock lending enables security dealers to obtain securities (shares and loan securities) to meet deliveries on sales of those securities, when the dealer has insufficient stock of its own to meet the delivery. The mechanisms under which stock lending takes place are similar to those of repos. The ‘stock lender’ will normally receive ‘manufactured payments’ equivalent to any dividends, interest or other rights that arise on the securities while they are loaned.

Guidance on stock lending can be found at CFM74100.

Manufactured interest and other manufactured payments

Manufactured payments normally arise under repos and stock lending arrangements where the transaction crosses an interest or dividend date, so that the temporary owner, instead of the original owner, receives the interest or dividend as the registered owner of the security.

Where interest is received by the temporary owner in respect of a security and is paid to the original owner in the form of a manufactured payment (‘manufactured interest’), the manufactured interest is taxed in the same way as if the original owner had received the actual interest. CTA09/PT6/CH9 brings manufactured interest within the loan relationships provisions. Further details are at CFM46050.

Other legislation dealing with manufactured payments is in ITA07/PT11/CH2, ITA07/PT15/CH9 and CTA10/Part 17. The legislation aims to tax and relieve manufactured payments as far as possible in the same way as the underlying ‘real’ interest or dividends, and imposes a requirement to deduct tax from certain payments. The guidance on these rules is at CFM74300 and includes material on

  • manufactured interest on UK securities
  • manufactured dividends on UK shares
  • manufactured overseas dividends (MODs).