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HMRC internal manual

Business Income Manual

Measuring the profits (particular trades): Private finance initiative (PFI): property business

Many PFI projects involving the construction or refurbishment of buildings are structured around a lease granted by the public sector purchaser to the private sector operator. The operator builds or refurbishes a PFI property on the land and grants a sub-lease back to the purchaser. Where this happens, or similar arrangements are entered into, so that the operator acquires an interest in, or rights over, land in the UK and derives rent, or other receipts, from exploiting that interest or right, the operator is carrying on a property business.

In addition the operator normally provides ancillary support services. Depending upon their scale and nature, these activities may amount to a separate trade (see BIM64035).

Where an operator has an interest in land, and grants a right of occupation or access to a purchaser, e.g. a sublease or licence, the part of the annual service payment (the ‘unitary charge’) that constitutes payment for the accommodation is taxable as property income (see BIM64035).

This is the case even where the terms of the lease specify a nominal rent and payment of the unitary charge is dependent on the operator meeting specified standards of performance. Profits from a property business encompasses more than rent and we consider that part of the unitary charge is payable for the right to occupy or use the land. Accordingly the unitary charge should be apportioned on a just and reasonable basis, between the part relating to the right to occupy or use the land and the part relating to the provision of services.

Before HMRC published this view in 1999 there were a number of PFI projects where the HMRC view was sought on the correct basis of charge under the then clearances scheme. Where, following such an application, advice was given that the whole of the unitary charge was chargeable as trading income, the question of the correct basis of charge should not be reopened (see BIM64015).

Further guidance on PFI and related property income issues is arranged as follows:

BIM64225 Third party revenue
BIM64295 onwards Interest
BIM64365 Deemed premium on lease
BIM64395 onwards Group relief