CFM72540 - Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the payments condition: meaning of payment

Meaning of payment

The words ‘payment’ and ‘receipt’ follow their normal meanings, consistent with case law (see for example the commentary on when interest is paid in CTM51790 and CFM35830). ‘Payment’ is a movement of funds in discharge of a legal obligation and ‘receipt’ must be taken as having a corresponding meaning. Thus, the terms include the disbursement or collection of funds in settlement of loans, interest or other expenses, and advancing funds by way of loan, and receipt of funds borrowed. ‘R’ will include the note issue proceeds received by a note-issuing company at the outset of the securitisation, and ‘P’ will include any amount that it advances to an intermediate borrowing company by way of loan or which it pays to the originator by way of purchase price for the assignment to it of the securitised assets.

However, it is clear that, in the context of the regulations, the words apply only to payments and receipts to and from third parties, and do not include a company effecting payments into, withdrawals from or transfers between accounts of the same company that are solely beneficially owned by the company in question (even where, as will normally be the case, such accounts form part of the security for the capital market arrangement). This means that such a transfer does not give rise to a ‘payment’ from the first account and a ‘receipt’ in the second account, and does not start the clock ticking again for the purposes of the payments condition.

Where a company sets aside an amount of ‘R’ to build up ‘RA’, it will generally do this by paying the sum in question into a deposit account which is solely beneficially owned by itself. The making of that deposit will not be regarded as a ‘payment’ by the company, and where the company makes a withdrawal from the account, it will not be regarded as a ‘receipt’.

Nor will ‘payment’ include a transfer of funds by a company to a trustee who holds the funds as a nominee (or equivalent) for the company. However, ‘payment’ will include a transfer of funds to a trustee who holds the trust property in undivided shares for the company and other persons (as will typically be the case with a “receivables trustee” of the type commonly encountered in securitisations), and ‘receipt’ will be construed on a corresponding basis.

It is common for securitisation companies to invest temporary accumulations of surplus cash received during a payment cycle in specified categories of permitted investments, exclusively beneficially owned by the company for so long as they are held by it. If such investments are pure deposits by the company (as would commonly be the case under ‘guaranteed investment contracts’), they will be treated in the same way as all other payments by the company into a bank account of its own.

On the other hand, if such investments are securities which the company purchases in the market, whether as a subscriber or in the secondary market, any amounts paid by the company to acquire such securities will be ‘payments’ and any amounts received by it on disposal or redemption of such securities will be ‘receipts’. If this distinction is abused, the ‘unallowable purposes’ provisions (CFM72570) may become relevant. In this connection, it should be noted that ‘permitted investments’ are normally held on a short-term basis (3 to 6 months) and only up to the end of the payment cycle in which they are acquired, at which point sale or redemption proceeds will normally be included in the funds which are subject to the applicable priority of payments for the company concerned.