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HMRC internal manual

Business Income Manual

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Private Finance Initiative (PFI): interest: trade: 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 25 years. The construction costs are financed by a bank loan. 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 hospital is completed.

Accounting period 1

Construction of the hospital is completed at the end of the first accounting period.

For tax purposes the design and construction costs are revenue expenditure (see BIM64025 onwards). For accounting purposes the example assumes that the hospital is reported as a finance debtor on the operator’s balance sheet, under FRS5 Application Note F (see BIM64070 onwards). The construction costs, including £5m interest on the loan, are shown as debited direct to the finance debtor on the balance sheet during the construction period.

Dr Finance debtor (construction expenditure and interest) £75m Cr Bank £75m
           

No income is receivable in the first accounting period.

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 £5m interest debit is to a current asset that does not fall within the definition of a fixed capital project and therefore the fixed capital asset or project rule (see BIM64245) does not apply. The accounting periods in which relief is given are those in which the £5m interest debit is matched against income credited to the finance debtor (see BIM64245). No adjustment is required in the trading profits computation.

Accounting period 2

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

For accounting purposes £12m is credited to the P&L account (being notional interest on the finance debtor and operating income) and £3m is credited to the finance debtor.

Dr Bank £15m Cr P&L account £12m
           
      Cr Finance debtor £3m

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

The £3m credited to the finance debtor is trading income for services provided and is therefore included as an addition in the trading profits computation (see BIM64125).

The proportion of the finance debtor, against which the £3m credit is matched, represents revenue construction costs and trade interest and is therefore included as an allowable deduction in the trading profits computation (see BIM64130).

Trading income computation  
   
Income (recognised in P&L account) £12m
Plus part payment £3m
  £15m
Less matching ‘costs’ and interest £3m
Profit (before overheads) £12m