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HMRC internal manual

Business Income Manual

Private Finance Initiative (PFI): contribution of land: example 1

Under a PFI agreement, a private sector operator grants a 25 year lease, on a fully equipped school, to a public sector purchaser (a local authority), and also agrees to provide ancillary support services for the period of the lease. In return the operator will receive an annual service payment, the unitary charge.

As part of the commercial arrangement, the purchaser contributes land with a current market value of £10 million, as a payment on account of future unitary receipts. The documentation makes this clear.

For tax purposes the school is a fixed capital asset of a property business and the provision of the ancillary support services is a trade. For accounting purposes the example assumes that the PFI property, i.e. the school, is reported as a fixed asset on the operator’s balance sheet under FRS5 Application Note F.

Under FRS5, assuming it is not acquired as trading stock, the land contributed is also reported as a fixed asset on the balance sheet of the operator, at its fair value of £10m. Either as part of the project asset, if the land is to be used in the project, or otherwise as a separate asset. The credit entry is to deferred income.

Dr Fixed assets £10m Cr Deferred income £10m

The deferred income is released to the profit and loss account over the period to which the contribution relates, normally this is the whole of the contract period.

For tax purposes we follow the accounting recognition of the income in the profit and loss account, subject to any over-riding statutory or case law principle. Therefore the £10m is recognised as trading income as it is released to the profit and loss account, not when the land is received (see BIM64180).