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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Private Finance Initiative (PFI): interest: non-trade: example 3

A private sector operator enters into a PFI contract with a public sector purchaser to lease residential accommodation to the purchaser for 25 years. In addition, the operator is to provide non-ancillary support services for the accommodation, and the purchaser’s existing housing stock, for the duration of the contract. The support trade commences immediately (see BIM64065). The operator builds the houses on land it acquires for the purpose, the construction costs being financed by a bank loan. In return, the operator receives an annual service payment, the unitary charge.

Accounting period 1

Construction of the residential accommodation is completed during the accounting period.

For tax purposes the design and construction costs of the accommodation are capital expenditure. The accommodation is a fixed capital asset of the operator’s property business (see BIM64025 onwards). For accounting purposes the example assumes that the accommodation 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 construction loan, are shown as debited direct to the finance debtor on the balance sheet during the construction period, at a figure of £75m representing cost.

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

A unitary payment of £15m is receivable in the first accounting period. The example assumes that £2m of the payment is for the provision of the accommodation (property business) and £13m for the provision of support services (trading).

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.

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

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

The £3m credited to the finance debtor is business income and is included as an addition in the trade profits and property income computations (see BIM64125).

The proportion of the finance debtor, against which the £3m credit is matched, represents capital construction costs and non-trade interest, since the loan is for the construction of a property used in a property business. Neither of these is an allowable deduction of the business for tax purposes (see BIM64295). No adjustment is required in the tax computations.

The interest is a non-trading debit to a fixed capital project and the fixed capital asset or project rule applies. If there are no other non-trading credits or debits of the period arising from the company’s loan relationships, this creates a non-trading deficit which can, for example, be set off against any profits of the company for the deficit period.

Tax computation   Trading income Property income Non-trade deficit
Income £12m      
Plus part payment £ 3m      
Profit (before overheads) £15m £13m £2m (£5m)