Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Business Income Manual

Private Finance Initiative (PFI): interest: non-trade: example 4

A private sector operator enters into a PFI contract with a public sector purchaser to lease a fully equipped hospital extension to the purchaser for 25 years. In addition, the operator is to provide non-clinical support services for the existing hospital, and the extension, for the duration of the contract. The support trade commences immediately (see BIM64065). The operator builds the extension 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 hospital extension is completed during the accounting period.

For tax purposes the design and construction costs of the extension are capital expenditure. The hospital extension is a fixed capital asset of the operator’s property business (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 construction loan, are debited to the work-in-progress (WIP) account and a notional sale is recognised on completion of the extension at the end of the accounting period. For accounting purposes the extension is therefore reported as a finance debtor on the operator’s balance sheet, under FRS5 Application Note F at a figure of £75m representing cost (see BIM64070 onwards).

Dr WIP account (construction costs and interest) £75m Cr Bank £75m
Dr P&L account (cost of sale) £75m Cr WIP account £75m
Dr Finance debtor £75m Cr P&L account (sale) £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 extension (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 and expenditure in the profit and loss account, subject to any over-riding statutory or case law principle.

The extension is a fixed asset of a property business, not trading stock, and therefore the notional sale is not recognised for tax purposes. The sale is therefore deducted in the tax computations. The costs of sale represent capital construction costs and non-trade interest, since the loan is for the construction of a property for a property business. Neither of these is an allowable deduction of the business for tax purposes (see BIM64295), and the whole is therefore added back in the tax computations.

The £3m credited to the finance debtor is business income and is included as an addition in the tax computations (see BIM64215).

The £5m interest is a non-trading debit to a fixed capital project and so the fixed capital asset or project rule applies (see BIM64295). 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 costs of sale £75m      
Plus part payment £ 3m      
Less sale £75m      
Profit (before overheads) £15m £13m £2m (£5m)