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CFM46230 | Deemed loan relationships: repos: tax rules: creditor repos

From HM Revenue & Customs · Corporate Finance Manual

Definition of ‘creditor repo’ (CTA09/S543)

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

  • Condition A: under an arrangement another person (‘the borrower’) receives from the lender any money or other asset (‘the advance’).

  • Condition B: in accordance with GAAP, the accounts of the lender for the period in which the advance is made record a financial asset in respect of the advance.

  • Condition C: under the arrangement the borrower sells securities to the lender.

  • Condition D: the arrangement provides that the lender will or may become entitled or obliged subsequently to sell those or similar securities.

  • Condition E: in accordance with GAAP, the subsequent sale of the securities would extinguish the financial asset in respect of the advance that has been recorded in the lender’s accounts.

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

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

Creditor repo: example

  • 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, agreed at the outset (this includes a finance return of 3)

C’s accounting entries, in accordance with GAAP
1/1/09 (making of advance):Dr Financial Asset 100; Cr Cash 100
30/6/09 (repayment of advance):Dr Cash 103; Cr Financial Asset 103

C has a creditor repo because all of the conditions in CTA09/S543 are met:

  • Condition A: A receives an advance of money from C.

  • Condition B: in accordance with GAAP, C records a financial asset in respect of that advance.

  • Condition C: A sells securities to C.

  • Condition D: C is entitled or obliged to sell those or similar securities.

  • Condition E: in accordance with GAAP, the selling of those securities extinguishes C’s financial asset in respect of the advance.

Further points to note

  • This transaction corresponds to the debtor repo example at CFM46350 (where A is a company).

  • C also has a creditor repo if, under the arrangement, it sells the securities to another person (‘B’) instead of to A. Such a transaction corresponds to the debtor quasi-repo example at CFM46370 (where A and B are companies).