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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Deemed loan relationships: repos: tax rules: debtor quasi-repo: first tax consequence: ‘relevant arrangements’

‘Relevant arrangements’ (CTA09/S550(1) (b) and (2))

An anti-avoidance rule means that CTA09/S550 also applies (so that a company is taxed on income as if it had held the securities) where the company has entered into a ‘relevant arrangement’.

A ‘relevant arrangement’ is one where

  • A company sells securities and is entitled or obliged to buy them back (or the company sells securities and another person is entitled or obliged to buy them, or another person sells securities and the company is entitled or obliged to buy them); and
  • The main purpose or one of the main purposes is to obtain a tax advantage. ‘Tax advantage’ takes its meaning from CTA10/S1139.

This rule is to prevent bondwashing in cases where a company sells to a creditor securities that are about to pay a dividend, with the intention that the income transferred to the creditor will (in whole or part) discharge a liability owed to it by the seller, and that the seller avoids tax on that income.

Example

X Ltd (not a financial trader) owes £1m to Y Inc. It discharges this debt by entering into an arrangement under which it sells a holding of overseas equities to Y Inc shortly before they pay a dividend of £1m (no withholding tax) which it has accrued in its accounts, and buys them back after the dividend has been paid. The transaction is not a financing one and is not accounted for as a repo in X Ltd’s accounts.

The transaction is a relevant arrangement because X Ltd has sold securities and bought them back, and because a main purpose is to obtain a tax advantage, namely the avoidance of tax on the dividend of £1m. X Ltd has received the benefit of this dividend because it has been used to discharge its liability to Y Inc but has not received the dividend itself: since the transaction is not treated as a financing repo in X Ltd’s accounts, the transaction would not be a debtor or quasi debtor repo.

Since X Ltd has discharged its liability under a relevant arrangement, it is taxed as if it had received the real income of £1m.

(Under the previous repo rules, such an arrangement would have been caught by ICTA88/S737A (since X Ltd would have been deemed to receive a manufactured payment equivalent to the income alienated under the arrangement). Since S737A is repealed for arrangements coming into force on or after 1 October 2007, the new rule reproduces its effect.)