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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: repos: tax rules: creditor quasi-repos: first tax consequence

Creditor repos and creditor quasi-repos: first tax consequence (CTA09/S545)

The first tax consequence for creditor repos and creditor quasi-repos is that the lender is taxed, in respect of its income arising while the arrangement is in force, as if it did not hold the securities that are initially sold, and did not make any manufactured payments in respect of those securities.

This rule corresponds to the rule for debtor repos and debtor quasi-repos (CFM46380). Its purpose is to ensure that the lender is not taxed on any income that arises on the securities during the period of the repo, and does not obtain tax relief for any manufactured payments made. The rule reflects the fact that neither the income nor the payment will generally be recognised for accounts purposes.

There are two qualifications to this rule.

First qualification

An amount of income is not to be ignored for CT purposes if, in accordance with GAAP, it is recognised in determining the lender’s profit or loss or is taken into account in calculating the amounts which are so recognised (for the meaning of ‘recognised in determining… profit or loss’. see CFM46210).

The purpose of this qualification is to ensure that in cases where the lender’s overall accounting return from the repo takes into account income arising on the securities (for instance, because there is no requirement on the lender to make any manufactured payments but there is an equivalent reduction in the repurchase price) then that will be respected for tax purposes. But it would also apply where, exceptionally, the income is recognised in the lender’s profit and loss account or similar accounting statement.

Second qualification

A manufactured payment is not to be ignored for CT purposes if, in accordance with GAAP, it is recognised in determining the lender’s profit or loss (for the meaning of ‘recognised in determining… profit or loss’. see CFM46210). For instance, it is possible that a payment made by a lender who has repoed in a security to cover a short sale (and therefore does not receive the real income) may be so recognised.

This qualification is in turn subject to other provisions that may restrict the deductibility of manufactured payments (for instance, CTA10/S799 (manufactured payments for unallowable purposes)).

If exceptionally a financial trader with a net-paying creditor repo records in accordance with GAAP a profit and loss debit that corresponds to income arising on the securities (for instance, because it has repoed in the security to cover a short sale), normal trade income principles will apply to the debit.