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HMRC internal manual

Business Income Manual

Private Finance Initiative (PFI): accounting and tax: income and expenditure recognition: example 3

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 a hospital and maintain it for 30 years. The trade commences when the PFI agreements are signed (see BIM64065). In return the operator receives an annual service payment, the unitary charge, which commences after the hospital is completed.

Accounting period 1

For tax purposes the design and construction costs are revenue expenditure. The hospital is not a fixed capital asset of the operator’s trade (see BIM64025 onwards). For accounting purposes the example assumes that SSAP9 ‘Stock and long-term contracts’ principles are adopted during the construction period (see BIM64085 onwards). The construction costs of the hospital are debited to the work-in-progress account (WIP) and a sale is recognised on completion of the hospital at the end of the accounting period. For accounting purposes the hospital is therefore reported as a finance debtor on the operator’s balance sheet, under FRS5 Application Note F, at a figure of £90m representing cost (see BIM64070).

Dr WIP account (construction costs) £90m Cr Bank £90m
Dr P&L account (cost of sales) £90m Cr WIP account £90m
Dr Finance debtor £90m Cr P&L account (sale) £90m

No income is receivable in the first accounting period.

The sale is recognised for tax purposes, as is the deduction for WIP.

Accounting period 2

A unitary payment of £15m is receivable in the second accounting period.

For tax purposes the £15m is trading income for the provision of services. For FRS5 accounting purposes, £7m represents a part payment of the finance debtor and £8m represents operating income.

For accounting purposes, a figure representing accrued finance income on the finance debtor, i.e. notional interest, for the accounting period is calculated at £4m and credited to the profit and loss account. The corresponding debit is to the finance debtor.

Dr Finance debtor £4m Cr P&L account (notional interest) £4m

The part payment of £7m is then credited to the finance debtor and the operating income of £8m is credited to the profit and loss account.

Dr Cash £15m Cr P&L account (operating income) £8m
      Cr Finance debtor (part payment) £7m

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

The £8m operating income and the £4m notional interest are the recognition of trading income of the accounting period for tax purposes (see BIM64125).

The whole of the finance debtor has already been recognised for tax purposes as a £90m sale in the first accounting period. Therefore no adjustment is required in the trading profits computation for the income credited to the finance debtor.

Trading income computation  
Income (recognised in P&L account) £12m
Profit (before overheads) £12m