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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Measuring the profits (particular trades): Private Finance Initiative (PFI): scope of trade: example 1

A private sector operator enters into a PFI contract with a public sector purchaser (The Home Office), to provide a specified number of fully supported prison places over a 25-year period. In return the operator receives an annual service payment, the unitary charge. The operator constructs a prison, on land it acquires for the purpose, and engages its own staff to operate the facility.

The operator’s trade is running a prison, i.e. providing fully supported prison accommodation. The operator is not carrying on a property business since it is not exploiting, as a source of rents or other receipts, its interest in the property. The property is not trading stock, it provides the setting in which the operator carries on its trade.

For tax purposes, the prison is a fixed capital asset of the operator’s trade and the costs of building the prison are capital expenditure. Relief against trading income, for the construction costs, is only available to the extent that elements of that capital expenditure qualify for capital allowances.

The accounting treatment is of limited assistance in determining the scope of the PFI trade. If FRS5 Application note F is applicable, ownership of the prison may not be reflected in its accounting treatment, i.e. it may be reported as either a financial asset or a fixed asset on the balance sheet (see BIM64070 onwards).

See also BIM64035.