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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Deemed loan relationships: repos: tax rules: debtor and debtor quasi-repos: further examples: gross-paying

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

CFM46350 explains why A has a debtor 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 charge of 3 (6 months at 6% per annum).

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.
A’s accounting entries, in accordance with GAAP in addition to the entries at CFM46350:  
31/5/09 (real dividend/ interest paid to C, manufactured payment received by A) Dr Cash 10; Cr Dividend/Interest accrual 10
1/1/09-30/6/09 (repo ‘interest’ accrual): Dr P&L 3; Cr Financial Liability 3 (the financial liability which has increased to 103 is reduced to nil by the payment of the repurchase price on 30/6/09)
Net Profit and Loss result: Credit 10: income on securities
  Debit 3: ‘interest’

Tax Treatment of A

  • A is treated as receiving the real income of 10 on 31/5/09. The treatment of this income will depend on whether A is a financial trader, and on the type of security
  • As in the example at CFM46430, A’s finance charge of 3 is treated as interest for loan relationships purposes.

Further points to note

  • If the securities are overseas equities, A’s entitlement to DTR is based on the tax deducted from the manufactured overseas dividend received, not on the tax deducted from the real dividend (CFM46390).
  • This transaction corresponds to the creditor repo example at CFM46310 (where C is a company).
  • A’s tax treatment would be the same if, instead of repurchasing the securities from C, A purchased them from another person (‘D’). In such a transaction both C and D (if they are companies) would have creditor quasi-repos. CFM46330 gives examples of creditor quasi-repos.