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HMRC internal manual

Business Income Manual

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Private Finance Initiative (PFI): interest: trade: example 5

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 SSAP9 ‘Stock and long-term contracts’ principles are adopted during the construction period. The construction costs, including £5m interest on the loan, are debited to the work-in-progress (WIP) account 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 (see BIM64125), under FRS5 Application Note F (see BIM64070 onwards).

Dr WIP account (construction costs and interest) £75m Cr Bank £75m
           
Dr P&L account (cost of sales) £75m Cr WIP account £75m
Dr Finance debtor £75m Cr P&L account (sale) £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 sale is therefore recognised for tax purposes and the debits for construction costs and interest are allowable. No adjustment is required in the trading profits computation.

Trading income computation  
   
Income (net of construction costs and interest) £0
Profit (before overheads) £0

Accounting period 2

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

For accounting purposes £12m is credited to the profit and loss account (being notional interest on the finance debtor and operating income) and £3m is credited to the finance debtor (see BIM64125).

 

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 whole of the finance debtor has already been recognised as a sale for tax purposes in the first accounting period. Therefore no further adjustments are required in the trading profits computation.

 

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