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HMRC internal manual

Business Income Manual

Private Finance Initiative (PFI): accounting and tax: income and expenditure recognition: example 1

A private sector operator, whose trade includes the provision of design, construction and maintenance services, enters into a PFI contract with a public sector purchaser to build student accommodation and maintain it for 30 years. The trade commences when the PFI contract is signed (see BIM64065). In return the operator receives an annual service payment, the unitary charge, which commences after the accommodation is completed.

Accounting period 1

The accommodation is completed at the end of the first accounting period.

For tax purposes the design and construction costs are revenue expenditure. The accommodation is not a fixed capital asset of the operator’s trade (see BIM64025 onwards). For accounting purposes the example assumes that it is reported as a fixed asset on the operator’s balance sheet, under FRS5 Application Note F, at a figure of £90m representing cost (see BIM64070 onwards).

Dr Fixed asset £90m Cr Bank £90m

No income is received in the first accounting period.

Accounting period 2

In the second accounting period a unitary payment of £15m is receivable.

For tax purposes the £15m is trading income for the provision of services. For accounting purposes the whole of the unitary payment is credited to the profit and loss account. Depreciation on the fixed asset, calculated at £3m, is debited to the profit and loss account.

Dr Bank £15m Cr P&L account £15m
Dr P&L account (depreciation) £ 3m Cr Accumulated depreciation account £ 3m

For tax purposes we follow the accounting recognition of income and expenditure in the profit and loss account, subject to any relevant over-riding statutory or case law principle.

The £15m unitary payment is trading income for services provided (see BIM64125). The £3m depreciation represents revenue construction expenditure and is an allowable deduction for tax purposes (see BIM64130). Therefore no adjustments are required in the trading profits computation.

Trading income computation  
Income (net of depreciation) £12m
Profit (before overheads) £12m