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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: debtor repos

Definition of a debtor repo (CTA09/S548)

A company (‘the borrower’) has a debtor repo if all of the following conditions are met:

  • Condition A: under an arrangement the borrower receives from another person (‘the lender’) any money or other asset (‘the advance’).
  • Condition B: in accordance with GAAP, the accounts of the borrower record for the period in which the advance is received a financial liability in respect of the advance.
  • Condition C: under the arrangement the borrower sells any securities to the lender.
  • Condition D: the arrangement provides that the borrower will or may become entitled or obliged subsequently to buy those or similar securities.
  • Condition E: in accordance with GAAP, the subsequent buying of the securities would extinguish the financial liability in respect of the advance that has been recorded in the borrower’s accounts.

A company also has a debtor repo if it is a member of a partnership that meets these conditions.

These conditions cover normal repos executed under standard market documentation. However they also go slightly wider: since Condition D does not specify from whom the borrower is entitled or obliged to buy the securities, this can be a person other than the ‘lender’.

Debtor repo: example

  • 1/1/09: The borrower (A) sells securities to the lender (C), for which it receives an advance of 100.
  • 30/6/09: A repurchases the same or similar securities from C for 103, agreed at the outset (this includes a finance charge of 3):
A’s accounting entries, in accordance with GAAP  
   
1/1/09 (receipt of advance): Dr Cash 100; Cr Financial Liability 100
30/6/09 (repayment of advance): Dr Financial Liability 103; Cr Cash 103

A has a debtor repo because all of the above conditions are met:

  • Condition A: A receives an advance of money from C.
  • Condition B: in accordance with GAAP, A records a financial liability in respect of that advance.
  • Condition C: A sells securities to C.
  • Condition D: A is entitled or obliged to buy those or similar securities.
  • Condition E: in accordance with GAAP, the buying of those securities extinguishes A’s financial liability in respect of the advance.

Further points to note

  • This example corresponds to the creditor repo example at CFM46230 (where C is a company).
  • A also has a debtor repo if, under the arrangement, it purchases the securities from another person (‘D’) instead of repurchasing them from C. Such a transaction corresponds to the creditor quasi-repo example at CFM46250 (where C and D are companies).