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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 and creditor quasi-repos: further examples: gross-paying

Example: creditor repo: income arises on securities during term of repo, manufactured payment made (‘gross-paying’ transaction)

CFM46230 explains why A has a creditor repo in this case.

  • 1/1/09: A (borrower) sells securities to C (lender) for 100.
  • 30/6/09: A repurchases the same or similar securities from C for 103. This includes a finance return of 3.

In addition:

  • 31/5/09: Securities pay income of 10 to C (dividend if equities, interest if debt securities).
  • 31/5/09: C makes manufactured payment of 10 to A.
C’s accounting entries, in accordance with GAAP in addition to the entries at CFM46230:  
   
31/5/09 (real dividend/ interest paid to C) Dr Cash 10; Cr Financial Asset 10
31/5/09 (manufactured payment made to A) Dr Financial Asset 10; Cr Cash 10
1/1/09-30/6/09 (repo ‘interest’ accrual): Dr Financial Asset 3; Cr P&L 3 (the financial asset which has increased to 103 is reduced to nil by receipt of the repurchase price on 30/6/09)

Tax Treatment of C

  • C’s finance return of 3 is treated as interest for loan relationships purposes (CFM46270).
  • C’s receipt of the real income and making of the manufactured payment are both disregarded for CT purposes (CFM74300).
  • 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 (the manufactured payment itself is ignored for tax deduction purposes). See CFM74300.

Further points to note

  • This transaction corresponds to the debtor repo example at CFM46440 (where A is a company).
  • C’s tax treatment would be the same if, instead of selling the securities to A, C sold them to another person (‘B’). In such a transaction both A and B (if they are companies) would have debtor quasi-repos. There are examples of debtor quasi-repos at CFM46460.