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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: repos: tax rules: main features

Main features of repo corporation tax rules

Schedule 13 FA 2007 introduced major changes to the corporation tax rules on repos that were intended to achieve the following.

Simplification: the previous rules were highly mechanical and had become complex as a consequence of piecemeal changes; the new rules provide a simpler accounts-based regime.

Fairness: there had been a number of artificial arrangements under the old rules whose object was to generate artificial tax deductions or produce tax-free profits.

Modernisation: the old rules were out of line with more recent legislation that taxes similar financial instruments in accordance with their treatment under UK generally accepted accounting practice (GAAP).

The main features of the rules in FA 2007 (now rewritten as CTA09/PT6/CH10) are as follows.

  • There is an explicit statement in CTA09/S542 that the purpose of the legislation is that repo arrangements that equate in substance to the lending of money by or to a company (with the securities acting as collateral for the loan) are to be taxed in accordance with their economic substance and accounting treatment. This provision is intended on the one hand to deter the type of avoidance schemes that under the previous legislation depended on narrowly interpreting its terms, and on the other hand to give taxpayers assurance that HMRC will not be able to argue for a different treatment from that shown in the accounts, on the grounds that the legislation is not absolutely explicit as to how a particular matter is to be treated.
  • Where there is any tension between the purposive statement and the detailed provisions, the result obtained by adopting the purposive approach should be preferred over a literal interpretation.
  • The provision for the tax treatment of repo transactions to follow their accounting treatment under generally accepted accounting practice (‘GAAP’, meaning either UK GAAP or IAS). If accounts have not been drawn up in accordance with GAAP, the rules apply as if they had been.
  • Four types of repo transaction are defined.

    • Creditor repos and debtor repos: simple (usually two-party) repos from the point of view, respectively, of the cash lender and cash borrower.
    • Creditor quasi-repos and debtor quasi-repos: more complex repos from the point of view, respectively, of the cash lender and cash borrower.
  • The whole arrangement is treated as a loan relationship.
  • The rules make it clear that income arising on the securities during the period of a repo is taxed only in the hands of the cash borrower. The corollary of this is that relief for manufactured payments made by the cash lender is not available except in extremely restricted circumstances.
  • There is a continuing requirement to deduct tax from certain manufactured payments (CFM74300).
  • Transfers of securities into and out of repos continue to be disregarded for the purposes of corporation tax on chargeable gains.

The treatment of price differences under repos for income tax purposes is explained at SAIM2200.