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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 and debtor quasi-repos: further examples: debtor quasi-repo

Example: debtor quasi-repos

CFM46370 explains why both A and B have a debtor quasi-repo in this case.)

  • 1/1/09: A sells securities to C for 100.
  • 30/4/09: A novates its rights and obligations under the repo to B (also a borrower), for which it pays 102 to B. This represents the advance of 100 from C, plus a finance charge of 2 (4 months at 6% per annum). (The transaction will separately reflect the market value of the securities being transferred to B.)
  • 30/6/09: B purchases the same or similar securities from C for 103. This includes a further finance charge of 1 (2 months at 6% per annum).

Treatment of A

Accounting entries, in accordance with GAAP (excluding profit/loss on disposal to B) in addition to the entries at CFM46370:  
   
1/1/09-30/4/09 (repo ‘interest’ accrual): Dr P&L 2; Cr Financial Liability 2 (the financial liability which has increased to 102 is reduced to nil by the novation payment made on 30/4/09)
Net Profit and Loss result: Debit 2: ‘interest’

Tax Treatment

A’s finance charge of 2 is treated as interest for loan relationships purposes (CFM46410).

Treatment of B

Accounting entries, in accordance with GAAP (excluding acquisition cost of securities) in addition to the entries at CFM46370:  
   
30/4-30/6/09 (repo ‘interest’ accrual): Dr P&L 1; Cr Financial Liability 1 (the financial liability which has increased to 103 is reduced to nil by the payment of the purchase price on 30/6/09)
Net Profit and Loss result: Debit 1: ‘interest’

Tax Treatment

B’s finance charge of 1 is treated as interest for loan relationships purposes (CFM46410).

Further point to note

This transaction corresponds to the creditor repo referred to in the footnote to the example at CFM46300 (where C is a company).