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Corporation Tax Manufactured Payments – Draft Legislation and Explanatory Note

Draft Legislation

1 Relationships treated as loan relationships etc: repos

  1. In paragraph 4 of Schedule 13 to FA 2007 (ignoring effect on borrower of sale of securities), in sub-paragraph (4) omit “and” at the end of paragraph
    1. and after that paragraph insert –“
      • (aa) an amount representative of income payable in respect of the securities is not to be ignored as a result of sub-paragraph (3)(b) if it is, in accordance with generally accepted accounting practice, so recognised or taken in account, and”.
  2. In section 550 of CTA 2009 (ignoring effect on borrower of sale of securities) –
    1. in subsection (4) for “and (6)” substitute “to (6)”, and
    2. after subsection (5) insert –“
      (5A) For the purpose of the charge to corporation tax, an amount representative of income payable in respect of the securities is not to be ignored as a result of subsection (3)(b) if –
    1. it is, in accordance with generally accepted accounting practice, recognised in deter-mining the borrower's profit or loss for that or any other period, or
    2. it is taken into account in calculating the amounts which are so recognised.”
  3. The amendments made by this section are treated as always having had effect.

Explanatory Note

Subsection (1) amends paragraph 4 of Schedule 13 to FA2007 by inserting additional wording into the rules dealing with manufactured payments received by companies to put beyond doubt that where such amounts are received in the course of a sale and repurchase transaction (‘repo’), those payments must be taken into account for tax to the extent they are taken into account in accordance with generally accepted accounting practice (GAAP).

Subsection (2) makes an equivalent change to Section 550 of the Corporation Tax Act 2009, which is identical to paragraph 4 of Schedule 13, to ensure that repos to which that Act applies are also covered by the change.

Subsection (3) contains the commencement rule, which is that is the amendments are to be treated as always having had effect. In practice this means that they are treated as having effect from the date the legislation in respect of repos came into force-1 October 2007.

Background Note

Manufactured payments arise where under an arrangement for the transfer of debt securities (government or corporate debt instruments) one party is required to pay to the other an amount that is representative of interest on those securities.

The changes made by subsections 1 and 2 are a response to suggestion that the legislation in respect of repos is defective in its treatment of manufactured payments received by companies in the course of repos involving securities not recognised on balance sheet. The suggestion is that in that case the implicit fiction in section 550(3)(a) that the ‘borrower’ receives the real income from the securities is overridden by an alleged requirement in section 550(5)(a) that the real income is actually taken into account under generally accepted accounting practice-GAAP.

HM Revenue & Customs does not accept that this is the case, but the amendments put beyond doubt that the GAAP result must be respected for tax even if the accounts take into account not real income but manufactured payments.

Source: HMRC. www.hmrc.gov.uk. Copyright Acknowledged