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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Private Finance Initiative (PFI): accounting and tax: income and expenditure recognition: deductions

For tax purposes, accounts prepared according to generally accepted accounting practice are the starting point for the timing of allowable deductions (see BIM30510), subject to any over-riding statutory or case law principle.

Where the trade of a private sector operator includes the provision of design and construction services on trading account, the building costs of the PFI property are an allowable revenue deduction for tax purposes. Where the design and construction expenditure is to acquire a fixed capital asset of the operator’s business it is capital expenditure and not an allowable deduction for tax purposes.

PFI property

The property may be accounted for in the following ways:

  • SSAP9 ‘Stock and long-term contracts’ principles may be adopted during the construction period, with a sale being recognised in the profit and loss account and a finance debtor being reported on the operator’s balance sheet, under FRS5 Application Note F (see BIM64085). However, the use of SSAP9 principles during the construction phase is only appropriate when it has been determined that the risks and rewards in the property do not lie with the operator.
  • Alternatively, the design and construction costs may be recognised from the outset as either a fixed asset or finance debtor on the operator’s balance sheet under FRS5.

SSAP9

Where SSAP9 principles are adopted during the construction period, expenditure is debited to work-in-progress. When a sale is recognised work-in-progress is debited to the profit and loss account as a deduction. Thereafter, FRS5 will apply. Assuming that no over-riding statutory or case law principles apply, e.g. the expenditure is capital for tax purposes (see example 6 at BIM64165), we follow the accounting recognition of the deductions in the profit and loss account for tax purposes (see example 3 at BIM64150).

FRS5

Under FRS5 the expenditure in the construction period may be `capitalised’ from the outset, as either a fixed asset or a finance debtor, on the operator’s balance sheet.

Fixed asset

Where, for accounting purposes, a property is reported as a fixed asset it will normally be depreciated to the profit and loss account over the period of the contract. Where the depreciation relates to a fixed capital asset of the business for tax purposes, it is not an allowable deduction in computing the taxable profits (see example 4 at BIM64155). Where the depreciation represents capitalised revenue expenditure it is an allowable deduction for tax purposes. The timing of the accounting recognition of the depreciation of the capitalised revenue expenditure is followed for tax purposes (see example 1 at BIM64140), assuming no over-riding statutory or case law principle applies, e.g. see BIM64240 onwards concerning the statutory rules relating to interest.

Finance debtor

Where, for accounting purposes, a property is reported as a finance debtor, part of the income (i.e. part of the unitary charge) credited directly to it is never reflected in the profit and loss account. The matching reduction in the value of the finance debtor is also never reflected in the profit and loss account. In such circumstances the statutory principle that the charge on profits is made on the full amount of the profits applies (see BIM64125).

Provided that a tax adjustment has not already been made in respect of it (see BIM64240 onwards), capitalised revenue expenditure matched against such income is allowed as a deduction in the tax computation for the accounting period (see example 2 at BIM64145), in order to compute the full amount of the profits for tax purposes. Where the finance debtor represents capital expenditure for tax purposes, no deduction is allowable (see examples 5 and 6 at BIM64160 and BIM64165).

Further guidance on deductions is arranged as follows:

BIM64235 Pre-trading expenditure
   
BIM64240 onwards Interest
BIM64325 onwards Pre-trading interest