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HMRC internal manual

Corporate Finance Manual

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Deemed loan relationships: repos: tax rules: debtor repos and debtor quasi-repos: second tax consequence

Debtor repos and debtor quasi-repos: second tax consequence (CTA09/S551)

The second tax consequence for debtor repos and debtor quasi-repos is that the whole arrangement is treated as a loan relationship, and that the borrower obtains relief for any finance charge shown in its accounts that represents its cost of borrowing.

Whole arrangement is treated as a loan relationship

An advance under a debtor repo or debtor quasi-repo is treated as a money debt owed by the borrower (or, if the borrower is a member of a partnership, by the partnership) to the person to whom the securities are sold. This money debt is treated as arising from a transaction for the lending of money, so the borrower is treated as party to a debtor loan relationship in an amount equal to the advance.

The effect of treating the whole arrangement as a loan relationship is that all amounts in the borrower’s accounts in respect of the advance in accordance with GAAP, including items such as exchange gains and losses, are brought into account under the loan relationship rules.

Relief for the finance charge

Any amount that, in accordance with GAAP, is recorded in the accounts of the borrower (or, if the borrower is a member of a partnership that receives the advance, in the accounts of the partnership) as a finance charge in respect of the advance is treated as interest for the purposes of the loan relationship rules.

The deemed interest is treated as paid when ‘the relevant repurchase’ takes place or when it becomes apparent that that repurchase will not take place. ‘The relevant repurchase’ means the subsequent buying by the borrower of the securities or (in the case of a debtor quasi-repo) the subsequent receipt of the money or other asset from (or discharge of the liability to) the borrower. The date on which the interest is treated as paid establishes when tax should be deducted (where relevant), and when relief is given for loan relationship purposes in cases to which CTA09/PT6/CH8 applies (see the following paragraph).

CTA09/S551(2)(b) identifies the lender for the purposes of the loan relationship rules as the person who initially buys the securities. This enables the special computational rules CTA09/PT5/CH6 and CH8, which apply where there is a connection between borrower and lender, to apply appropriately to the deemed loan relationship. For instance, if

  • a borrower has a debtor repo in an accounting period, and is connected with the lender; and
  • the lender is outside the loan relationships regime; and
  • the interest is not paid (i.e. the securities are not repurchased) within 12 months of the end of the AP in which the accrual is made for it in the borrower’s accounts,

relief will be given for the deemed interest when it is paid (i.e. when the shares are repurchased), not as it accrues in the borrower’s accounts (the ‘interest long stop’: see CFM35800)

Deduction of income tax

Most repos arrangements are short term in nature. However it is not unknown for repos to be entered into that are intended to last for longer than a year. Since a repo finance charge is also treated as interest for the purposes of ITA07/PT15, payments of such charges are liable to deduction of income tax.