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The Government announced in the PBR that it intended to consult on the
introduction of a new regime governing the corporation tax treatment of sale
and repurchase (repo) transactions. Repo transactions involve the sale of
shares or securities, and their repurchase at a specified future date and
price. Under the terms of such arrangements, the risks and rewards of
ownership typically remain with the original owner. The arrangements are
thus economically equivalent to secured debt – with the shares or securities
that constitute the subject matter of the repo functioning as collateral.
The current corporation tax regime for repo transactions seeks (correctly)
to treat them as financing transactions. But it is somewhat piecemeal and
mechanical in nature. Furthermore, the rules have frequently been used for
tax avoidance purposes.
The Government has indicated that it wishes to replace them with a simpler
set of rules that address the accounting treatment more directly and that
are less vulnerable to avoidance activity. A consultation document with
draft clauses was published, and an “open day” on the proposals subsequently
hosted, by HMRC earlier this year. Revised draft clauses were published last
week. It is proposed to replace the current regime with rules modelled on
the Finance Act 2006 provisions relating to structured finance arrangements.
In broad terms, where arrangements fall within a defined concept of a repo
transaction, the arrangement will fall to be treated as a loan relationship
for corporation tax purposes. Consequently, the repo transaction will become
subject to the computational machinery of the loan relationships rules.
The political decision to reform the corporation tax treatment of repo
transactions in accordance with the consultation document has now,
apparently, been taken. The Government has been sensitive to representations
regarding the need to avoid market disruption and to plan for systems
changes. The legislation will have effect in respect of repo transactions
entered into on or after an appointed day. HMRC will continue to consult to
ensure that the eventual introduction of the new regime does not result in
unforeseen consequences.
Our view
It is clearly reasonable to replace the current regime with a simpler
system that assimilates repo transactions into the loan relationships
rules for corporation tax purposes. It is also sensible to consult
widely before making a change that affects commercially important
financial markets. HMRC may need to consider whether some aspects of the
loan relationships rules are suited to transactions that are largely
conducted between financial traders. For example, the rules relating to
loan relationships between connected persons might be considered
inappropriate where repo transactions are undertaken between connected
financial traders. |
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