CFM46430 | Deemed loan relationships: repos: tax rules: debtor and debtor quasi-repos: further examples: no income

From HM Revenue & Customs · Corporate Finance Manual

Example: debtor repo: no income arises on securities during term of repo

CFM46350 explains why A has a debtor repo in this case.)

1 January 2009: A (borrower) sells securities to C (lender) for 100.
30 June 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).

A’s accounting entries, in accordance with GAAP in addition to the entries at CFM46350;

1 January 2009 to 30 June 2009 (repo ‘interest’ accrual):

Dr P&L3
Cr Financial Liability 3 (the financial liability which has increased to 103 is reduced to nil by the payment of the repurchase price of 30 June 2009)

Net Profit and Loss result

A’s finance charge of 3 is treated as interest for loan relationships purposes.

This transaction corresponds to the creditor repo example at CFM46300 (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’). Such a transaction corresponds to the creditor quasi-repo examples at CFM46330 (where C and D are companies).