1.Section 45 clarifies that manufactured payments received by companies in the course of certain sale and repurchase (“repo”) transactions must be taken into account in calculating profits chargeable to corporation tax if they are taken into account in computing accounting profits. The clarification follows a recent challenge to the repo legislation in Chapter 10 of Part 6 of the Corporation Tax Act 2009 (CTA) – and its predecessor Schedule 13 to the Finance Act (FA) 2007 – that manufactured payments received by companies may not have to be taken into account for tax purposes if the securities to which they relate are not recognised on the companies’ balance sheets.
2.Subsection (1) amends paragraph 4 of Schedule 13 to FA 2007 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 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).
3.Subsection (2) makes an equivalent change to section 550 of CTA, which is identical to paragraph 4 of Schedule 13, to ensure that repos to which that Act applies are also covered by the change.
4.Subsection (3) contains the commencement rule, which is that 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.
5.Manufactured payments arise where under an arrangement for the transfer of securities one party is required to pay to the other an amount that is representative of real income on those securities.
6.The changes made by subsections (1) and (2) are a response to an assertion 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 the balance sheet. In these cases, it has been suggested that the implicit fiction in section 550(3)(a) of CTA (and for earlier transactions to which CTA does not apply paragraph 4(3)(a) of Schedule 13 to FA 2007) that the seller of the securities receives the real income from those securities is overridden by an alleged requirement in section 550(5)(a) (paragraph 4(4)(a) of Schedule 13 to FA 2007) that the real income must actually be taken into account under GAAP.
7.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 manufactured payments instead of real income.