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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: repos: tax rules: creditor and creditor quasi-repos: further examples: net-paying

Example: creditor repo: income arises on securities during term of repo, no manufactured payment made (‘net-paying’ transaction)

(This transaction differs from CFM46310 because the repurchase price is 93, not 103. However receipt of that repurchase price extinguishes C’s financial asset in respect of the advance (Condition E of the creditor repo conditions), so C has a creditor repo in this case.)

  • 1/1/09: A (borrower) sells securities to C (lender) for 100.
  • 31/5/09: Securities pay income of 10 to C (dividend if equities, interest if debt securities).
  • 30/6/09: A repurchases the same or similar securities from C for 93. This includes a finance return of 3 (in practice the return would be less than 3 because from 31/5-30/6/09 the advance is 90, not 100).
C’s accounting entries, in accordance with GAAP  
1/1/09 (receipt of advance): Dr Financial Asset 100; Cr Cash 100
31/5/09 (real dividend/interest paid to C): Dr Cash 10; Cr Financial Asset 10
1/1/09-30/6/09 (repo ‘interest’ accrual): Dr Financial Asset 3; Cr P&L 3
30/6/09 (repayment of advance): Dr Cash; 93 Cr Financial Asset 93
Net Profit and Loss result: Credit 3: ‘interest’

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 is 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.

Further points to note

  • The transaction is a debtor repo for A (if A is a company). The example at CFM46450 looks at this transaction from the point of view of the debtor.
  • C’s tax treatment would be the same if, instead of selling the securities to A, C sold them to another person (‘B’). Such a transaction would be a debtor quasi-repo for both A and B (if A and B are companies). There are examples of debtor quasi-repos at CFM46460.