CFM46200 – Corporate Finance Manual – HMRC Internal Manual


Main features of pension company taxation rules

Schedule 13 of the FA 2007 introduced major changes to the corporation tax rules on repurchase agreements which were intended to achieve the following objectives.

Simplification: Previous rules were very mechanical and had become complex as a result of piecemeal changes; the new rules provide for a simpler account-based regime.

Fairness: There had been a number of artificial arrangements under the old rules whose purpose was to generate artificial tax deductions or produce non-taxable profits.

Modernization: the old rules were not in line with more recent legislation which imposes similar financial instruments in accordance with their treatment under UK generally accepted accounting practice (GAAP).

The main features of FA Rules 2007 (now rewritten as CTA09/PT6/CH10) are as follows.

  • There is an explicit statement in CTA09/S542 that the purpose of the legislation is that repurchase agreements which amount in substance to the lending of money by or to a company (the securities acting as collateral for the loan) should be taxed in accordance with their economic substance and accounting treatment. This provision is intended on the one hand to deter the type of avoidance schemes which under previous legislation depended on a narrow interpretation of its terms, and on the other hand to provide taxpayers with the assurance that HMRC will not will not be able to plead in favor of a treatment different from that appearing in the accounts, on the ground that the legislation is not absolutely explicit as to the way in which a particular matter must be treated.
  • In the event of tension between the purposive statement and the detailed provisions, the result obtained by adopting the purposive approach should be preferred to a literal interpretation.
  • The provision that the tax treatment of repo transactions follow their accounting treatment under generally accepted accounting practice (“GAAP”, i.e. either UK GAAP or IAS). If accounts have not been prepared in accordance with GAAP, the rules apply as if they had been.
  • Four types of repo transactions are defined.
  • Creditor and debit repos: simple (usually bipartisan) repos from the perspective of the cash lender and cash borrower, respectively.
  • Quasi-repos creditor and quasi-repos debtor: more complex pensions from the point of view, respectively, of the lender and the borrower of cash.
  • The entire arrangement is treated as a loan relationship.
  • The rules specify that income generated by the securities during the repurchase period is only taxed in the hands of the borrower in cash. The corollary of this is that relief for manufactured payments made by the cash lender is not available except in extremely limited circumstances.
  • There is a continuing obligation to deduct tax from certain manufactured payments (CFM74300).
  • Transfers of securities to and from repos continue to be ignored for corporate tax purposes on taxable capital gains.

The treatment of price differences under repos for income tax purposes is explained in SAIM2200.


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