SolvedCFM46320 | Deemed loan relationships: repos: tax rules: creditor and creditor quasi-repos: further examples: net-paying
From HM Revenue & Customs · Corporate Finance Manual
Example: creditor repo: income arises on securities during term of repo, no manufactured payment made (‘net-paying’ transaction)
(This transaction differs from CFM46310 because the repurchase price is 93, not 103. However receipt of that repurchase price extinguishes C’s financial asset in respect of the advance (Condition E of the creditor repo conditions), so C has a creditor repo in this case.)
1/1/09: A (borrower) sells securities to C (lender) for 100.
31/5/09: Securities pay income of 10 to C (dividend if equities, interest if debt securities).
30/6/09: A repurchases the same or similar securities from C for 93. This includes a finance return of 3 (in practice the return would be less than 3 because from 31/5-30/6/09 the advance is 90, not 100).
| C’s accounting entries, in accordance with GAAP | |
|---|---|
| 1/1/09 (receipt of advance): | Dr Financial Asset 100; Cr Cash 100 |
| 31/5/09 (real dividend/interest paid to C): | Dr Cash 10; Cr Financial Asset 10 |
| 1/1/09-30/6/09 (repo ‘interest’ accrual): | Dr Financial Asset 3; Cr P&L 3 |
| 30/6/09 (repayment of advance): | Dr Cash; 93 Cr Financial Asset 93 |
| Net Profit and Loss result: | Credit 3: ‘interest’ |
Tax Treatment of C
C’s finance return of 3 is treated as interest for loan relationships purposes (CFM46270).
C’s receipt of the real income is disregarded for CT purposes (CFM74300).
Deduction of tax: C is deemed to make a manufactured payment to A and, depending on the nature of the security and the status of the borrower, may be required to deduct tax.
Further points to note
The transaction is a debtor repo for A (if A is a company). The example at CFM46450 looks at this transaction from the point of view of the debtor.
C’s tax treatment would be the same if, instead of selling the securities to A, C sold them to another person (‘B’). Such a transaction would be a debtor quasi-repo for both A and B (if A and B are companies). There are examples of debtor quasi-repos at CFM46460.