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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): accounting: FRS5 example 2

A private sector operator, whose trade includes the design, construction and maintenance of roads, enters into a PFI contract with a public sector purchaser, a local authority, to build a road and maintain it for 25 years. The land, including the completed road, belongs to the purchaser throughout the period of the contract. The operator is only granted a right of access to enable it to provide the construction and maintenance services. The operator receives an annual fee, the unitary charge, which is dependent upon the level of usage of the road, often referred to as a ‘shadow toll’.

For tax purposes the design and construction costs are allowable revenue expenditure. However, for accounting purposes it may well be determined that the benefits and risks inherent in the property lie with the operator (see BIM64075 onwards). If so, under FRS5 Application Note F the road is shown as a fixed asset, for accounting purposes, on the operator’s balance sheet, despite the operator not having ownership of the asset.