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HMRC internal manual

Business Income Manual

Private Finance Initiative (PFI): bid costs

A PFI contract is generally a trading contract for the provision of services in exchange for an annual payment, the unitary charge. The bid costs incurred by a private sector operator in making a bid for such a PFI contract are therefore revenue expenditure for tax purposes.

However, an analysis of expenditure associated with a bid may be required, in order to distinguish between actual bid costs and other expenditure, which may be capital for tax purposes. For example the costs of acquiring a lease, or granting a sub-lease, may be capital expenditure on the acquisition and creation of fixed capital assets of a business for tax purposes.

An operator bidding for a PFI project is often backed by a consortium, the members of which will provide it with the necessary construction, financial and support services should its bid prove successful. Often, as part of a commercial arrangement with the operator, the consortium members agree to guarantee the latter’s bid costs if the bid proves unsuccessful. Where a payment is made towards the operator’s abortive bid costs under such an arrangement, we accept that any benefit to the operator is incidental to the purpose of the consortium members in making the payment.

Alternative arrangements may involve the consortium members incurring the bid costs directly, with the operator repaying the costs should the bid prove successful. Again, should the bid prove unsuccessful we accept that any benefit to the operator is incidental to the purpose of the consortium members. Any repayments under such an agreement will be a taxable receipt of the consortium members’ trades. Any repayment of revenue expenditure, by the operator, will be an allowable deduction in computing their profits for tax purposes.

Variations of the above arrangements may be encountered, e.g. the repayment may take the form of a reduction of the unitary charge (the annual service payment). In such cases the same principle should be applied.