Finance Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 13 — Sale and repurchase of securities
181

Relief for borrower for finance charges in respect of the advance: debtor repos and debtor quasi-
repos
5     (1)
This paragraph applies if a company (“the borrower”) has a debtor repo or a
debtor quasi-repo.
      (2)
The advance under the debtor repo or debtor quasi-repo is, in the case of the
5
borrower, to be treated for the purposes of the loan relationship rules as a
money debt which—
(a)
is owed by the borrower or, if the borrower is a member of a
partnership which receives the advance, by the partnership, and
(b)
is owed to the person to whom the securities are initially sold.
10
      (3)
The arrangement is, in the case of the borrower, to be treated for the
purposes of those rules as a transaction for the lending of money from which
that debt is treated as arising for those purposes.
      (4)
Any amount which, in accordance with generally accepted accounting
practice, is recorded in—
15
(a)
the accounts of the borrower, or
(b)
if the borrower is a member of a partnership which receives the
advance, the accounts of the partnership,

as a finance charge in respect of the advance is to be treated for the purposes
of the loan relationship rules and Part 15 of ITA 2007 (deduction of income
20
tax at source) as interest payable under that debt.
      (5)
That interest is to be treated for those purposes as paid at the earlier of—
(a)
the time when the relevant repurchase takes place, and
(b)
the time when it becomes apparent that that repurchase will not take
place.
25
      (6)
For this purpose “the relevant repurchase” means—
(a)
if the borrower has a debtor repo, the subsequent buying of the
securities or similar securities, and
(b)
if the borrower has a debtor quasi-repo, the subsequent buying of the
securities or other securities by the borrower, the receipt of the asset
30
from the borrower or (as the case may be) the discharge of the
liability to the borrower.
Ignoring sale and subsequent purchase for purposes of chargeable gains: debtor repos
6     (1)
This paragraph applies if—
(a)
a company (“the borrower”) has a debtor repo, and
35
(b)
the borrower (having sold the securities under the arrangement to
the lender) is the only person with the right or obligation under the
arrangement to buy those or similar securities at any subsequent
time.
      (2)
The sale of the securities, and the subsequent purchase of those or similar
40
securities, by the borrower under the arrangement are to be ignored for the
purposes of corporation tax in respect of chargeable gains (but see sub-
paragraph (5)).
      (3)
If at any time after the initial sale of the securities—

Finance Bill
Schedule 13 — Sale and repurchase of securities
182

(a)
it becomes apparent that the borrower will not subsequently buy
those or similar securities under the arrangement, or
(b)
the accounting condition ceases to be met,

the borrower is to be treated for the purposes of corporation tax in respect of
chargeable gains as disposing of the securities at that time for a
5
consideration equal to their market value at that time.
      (4)
The accounting condition ceases to be met if, in accordance with generally
accepted accounting practice, the accounts of the borrower for any period
after the one in which the advance is received do not record a financial
liability in respect of the advance (except as a result of the subsequent
10
purchase of the securities or similar securities).
      (5)
If sub-paragraph (3) applies because the accounting condition ceases to be
met, any subsequent purchase of those or similar securities by the borrower
under the arrangement is not to be ignored for the purposes of corporation
tax in respect of chargeable gains as a result of this paragraph.
15
      (6)
For the purposes of this paragraph references to the borrower include a
partnership of which the borrower is a member.
Meaning of creditor repo
7     (1)
For the purposes of this Schedule a company (“the lender”) has a creditor
repo if conditions A to E are met.
20
      (2)
Condition A is that under an arrangement another person (“the borrower”)
receives from the lender any money or other asset (“the advance”).
      (3)
Condition B is that, in accordance with generally accepted accounting
practice, the accounts of the lender for the period in which the advance is
made record a financial asset in respect of the advance.
25
      (4)
Condition C is that under the arrangement the borrower sells any securities
at any time to the lender.
      (5)
Condition D is that the arrangement makes provision conferring a right or
imposing an obligation on the lender to sell those or similar securities at any
subsequent time.
30
      (6)
Condition E is that, in accordance with generally accepted accounting
practice, the subsequent sale of those or similar securities would extinguish
the financial asset in respect of the advance recorded in the accounts of the
lender.
      (7)
For the purposes of conditions A to E references to the lender include a
35
partnership of which the lender is a member.
Meaning of creditor quasi-repo
8     (1)
For the purposes of this Schedule a company (“the lender”) has a creditor
quasi-repo in any case if—
(a)
the lender does not have a creditor repo in that case, and
40
(b)
conditions A to E are met in that case.
      (2)
Condition A is that under an arrangement another person receives from the
lender any money or other asset (“the advance”).

Finance Bill
Schedule 13 — Sale and repurchase of securities
183

      (3)
Condition B is that, in accordance with generally accepted accounting
practice, the accounts of the lender for the period in which the advance is
made record a financial asset in respect of the advance.
      (4)
Condition C is that under that or any other arrangement a person sells any
securities at any time to the lender or any other person.
5
      (5)
Condition D is that the arrangement or other arrangement—
(a)
makes provision conferring a right or imposing an obligation on the
lender to sell the securities or any other securities at any subsequent
time, or
(b)
makes provision conferring such a right or imposing such an
10
obligation on any other person and makes other relevant provision.
      (6)
For this purpose any arrangement makes “other relevant provision” if it
makes provision—
(a)
for the receipt of any money, securities or other asset from the lender
under that arrangement for the purpose of enabling the other person
15
to make that subsequent sale, or
(b)
for the discharge of any liability to the lender under that
arrangement for that purpose (whether by way of set off or
otherwise).
      (7)
Condition E is that, in accordance with generally accepted accounting
20
practice—
(a)
the subsequent sale of the securities or the other securities by the
lender, or
(b)
the receipt of the asset from the lender, or the discharge of the
liability to the lender, under the arrangement or other arrangement,
25

would extinguish the financial asset in respect of the advance recorded in
the accounts of the lender.
      (8)
For the purposes of conditions A to E references to the lender include a
partnership of which the lender is a member.
Ignoring effect on lender of sale of securities: creditor repos and creditor quasi-repos
30
9     (1)
This paragraph applies if a company (“the lender”) has a creditor repo or a
creditor quasi-repo.
      (2)
For the purposes of the charge to corporation tax in respect of income of the
lender arising while the arrangement is in force, the Corporation Tax Acts
have effect as if—
35
(a)
the lender did not hold the securities that are initially sold for any
period for which the arrangement is in force, and
(b)
the lender did not make in that period any payment representative
of income payable in respect of those securities.
      (3)
But—
40
(a)
an amount is not to be ignored for the purposes of that charge as a
result of sub-paragraph (2)(a) if it is, in accordance with generally
accepted accounting practice, recognised in determining the lender’s
profit or loss for that or any other period or taken into account in
calculating the amounts which are so recognised, and
45

Finance Bill
Schedule 13 — Sale and repurchase of securities
184

(b)
a payment is not to be ignored for those purposes as a result of sub-
paragraph (2)(b) if the payment is, in accordance with that practice,
so recognised.
      (4)
Nothing in sub-paragraph (3)(b) affects the question whether (apart from
that provision) the payment (or any part of it) may be deducted in
5
calculating any income for corporation tax purposes or against total profits.
Charge on lender for finance return in respect of the advance: creditor repos and creditor quasi-
repos
10    (1)
This paragraph applies if a company (“the lender”) has a creditor repo or a
creditor quasi-repo.
10
      (2)
The advance under the creditor repo or creditor quasi-repo is, in the case of
the lender, to be treated for the purposes of the loan relationship rules as a
money debt which—
(a)
is owed to the lender or, if the lender is a member of a partnership
which makes the advance, to the partnership, and
15
(b)
is owed by the person who initially sold the securities.
      (3)
The arrangement is, in the case of the lender, to be treated for the purposes
of those rules as a transaction for the lending of money from which that debt
is treated as arising for those purposes.
      (4)
Any amount which, in accordance with generally accepted accounting
20
practice, is recorded in—
(a)
the accounts of the lender, or
(b)
if the lender is a member of a partnership which makes the advance,
the accounts of the partnership,

as a finance return in respect of the advance is to be treated for those
25
purposes as interest receivable under that debt.
      (5)
That interest is to be treated for those purposes as received at the earlier of—
(a)
the time when the relevant repurchase takes place, and
(b)
the time when it becomes apparent that that repurchase will not take
place.
30
      (6)
For this purpose “the relevant repurchase” means—
(a)
if the lender has a creditor repo, the subsequent sale of the securities
or similar securities, and
(b)
if the lender has a creditor quasi-repo, the subsequent sale of the
securities or other securities by the lender, the receipt of the asset
35
from the lender or (as the case may be) the discharge of the liability
to the lender.
Ignoring purchase and subsequent sale for purposes of chargeable gains: creditor repos
11    (1)
This paragraph applies if—
(a)
a company (“the lender”) has a creditor repo, and
40
(b)
the lender (having bought the securities under the arrangement from
the borrower) is the only person with the right or obligation under
the arrangement to sell those or similar securities at any subsequent
time.

Finance Bill
Schedule 13 — Sale and repurchase of securities
185

      (2)
The purchase of the securities, and the subsequent sale of those or similar
securities, by the lender under the arrangement are to be ignored for the
purposes of corporation tax in respect of chargeable gains (but see sub-
paragraph (5)).
      (3)
If at any time after the initial purchase of the securities—
5
(a)
it becomes apparent that the lender will not subsequently sell those
or similar securities under the arrangement, or
(b)
the accounting condition ceases to be met,

the lender is to be treated for the purposes of corporation tax in respect of
chargeable gains as acquiring the securities at that time for a consideration
10
equal to their market value at that time.
      (4)
The accounting condition ceases to be met if, in accordance with generally
accepted accounting practice, the accounts of the lender for any period after
the one in which the advance is made do not record a financial asset in
respect of the advance (except as a result of the subsequent sale of the
15
securities or similar securities).
      (5)
If sub-paragraph (3) applies because the accounting condition ceases to be
met, any subsequent sale of those or similar securities by the lender under
the arrangement is not to be ignored for the purposes of corporation tax in
respect of chargeable gains as a result of this paragraph.
20
      (6)
For the purposes of this paragraph references to the lender include a
partnership of which the lender is a member.
Repo under arrangement designed to produce quasi-interest: anti-avoidance
12    (1)
This paragraph applies if—
(a)
under an arrangement a person receives any money or other asset
25
(“the advance”) from a company (or a partnership of which the
company is a member),
(b)
the company does not have a creditor repo or creditor quasi-repo by
reference to the arrangement but would have one on the applicable
accounting assumption (reading condition E in paragraphs 7 and 8
30
in the light of that assumption),
(c)
the arrangement is designed to produce a return (“the quasi-
interest”) to the company (or partnership of which it is a member)
which equates, in substance, to the return on an investment of money
at interest, and
35
(d)
the main purpose, or one of the main purposes, of the arrangement
is the obtaining of a tax advantage.
      (2)
Paragraph 10 is to have effect as if—
(a)
the company had a creditor repo by reference to the arrangement,
and
40
(b)
the quasi-interest were an amount recorded as mentioned in sub-
paragraph (4) of that paragraph.
      (3)
In this paragraph “the applicable accounting assumption” is the assumption
that, in accordance with generally accepted accounting practice, the
accounts of the company (or the partnership of which it is a member) for the
45
period in which the advance is made record a financial asset in respect of the
advance.

Finance Bill
Schedule 13 — Sale and repurchase of securities
186

Requirements to deduct tax from manufactured payments: creditor repos and debtor repos
13    (1)
If a company has a creditor repo, Chapter 9 of Part 15 of ITA 2007 (deduction
of income tax at source: manufactured payments) has effect in relation to the
lender while the arrangement is in force as if—
(a)
the lender paid the borrower amounts which are representative of
5
the income payable on the securities that are initially sold,
(b)
the payments were made under requirements of the arrangement,
and
(c)
the payments were made on the dates on which the income is
payable.
10
      (2)
If a company has a debtor repo, the reverse charge provisions of Chapter 9
of Part 15 of ITA 2007 have effect in relation to the borrower while the
arrangement is in force as if—
(a)
the lender paid the borrower amounts which are representative of
the income payable on the securities that are initially sold,
15
(b)
the payments were made under requirements of the arrangements,
and
(c)
the payments were made on the dates on which the income is
payable.
      (3)
If sub-paragraph (1) or (2) applies, any payment actually made under an
20
arrangement which is representative of any income payable on any
securities is to be treated for the purposes of Chapter 9 of Part 15 of ITA 2007
as if it had not been made.
      (4)
In this paragraph “the reverse charge provisions of Chapter 9 of Part 15 of
ITA 2007” means—
25
(a)
regulations under section 918(4) of ITA 2007 (manufactured
dividends on UK shares (Real Estate Investment Trusts): the reverse
charge),
(b)
section 920 of that Act (foreign payers of manufactured interest: the
reverse charge), and
30
(c)
section 923 of that Act (foreign payers of manufactured overseas
dividends: the reverse charge).
Interpretation etc
14    (1)
In this Schedule—
“arrangement” includes any agreement or understanding (whether or
35
not legally enforceable),
“creditor quasi-repo” has the meaning given by paragraph 8,
“creditor repo” has the meaning given by paragraph 7,
“debtor quasi-repo” has the meaning given by paragraph 3,
“debtor repo” has the meaning given by paragraph 2,
40
“discharge”, in relation to a liability, means the discharge of the liability
in whole or in part (and “discharged” is to be read accordingly),
“the loan relationship rules” means the provisions of Chapter 2 of Part
4 of FA 1996,
“market value” has the same meaning as in TCGA 1992,
45

Finance Bill
Schedule 13 — Sale and repurchase of securities
187

“overseas dividend”, in relation to overseas securities, means any
interest, dividend or other annual payment payable in respect of the
securities,
“overseas securities” means shares, stock or other securities issued by—
(a)
a government or public or local authority of a territory
5
outside the United Kingdom, or
(b)
any other body of persons not resident in the United
Kingdom,
“securities” (except in the definition of “overseas securities”) means
shares, stock or other securities issued by—
10
(a)
the government of the United Kingdom,
(b)
any public or local authority in the United Kingdom, or
(c)
any company or other body resident in the United Kingdom,
or overseas securities, and
“tax advantage” has the meaning given by section 840ZA of ICTA.
15
      (2)
For the purposes of this Schedule references to a person’s receiving any asset
include the person’s obtaining directly or indirectly the value of any asset or
otherwise deriving directly or indirectly any benefit from it.
      (3)
For the purposes of this Schedule—
(a)
in any case where a person buys securities (or has a right or
20
obligation to buy securities) but the securities are (or are to be) held
for another person’s benefit, that other person is treated as buying
(or having the right or obligation to buy) the securities, and
(b)
in any case where a person sells securities but the proceeds of the sale
are held for another person’s benefit, that other person is treated as
25
selling the securities.
      (4)
For the purposes of this Schedule securities are similar if they entitle their
holders to—
(a)
the same rights against the same persons as to capital, interest and
dividends, and
30
(b)
the same remedies for the enforcement of those rights,

in spite of any difference in the total nominal amounts of the respective
securities or in the form in which they are held or the manner in which they
can be transferred.
      (5)
For the purposes of this Schedule it does not matter whether or not provision
35
of any arrangement conferring a right or imposing an obligation on any
person to buy any securities is subject to any conditions.
      (6)
For the purposes of this Schedule an arrangement is in force from the time
when the securities are initially sold until the earlier of—
(a)
the time when the relevant repurchase takes place, and
40
(b)
the time when it becomes apparent that that repurchase will not take
place.
      (7)
For this purpose “the relevant repurchase” means—
(a)
in the case of a debtor repo, the subsequent buying of the securities
or similar securities,
45
(b)
in the case of a debtor quasi-repo, the subsequent buying of the
securities or other securities by the borrower, the receipt of the asset