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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Private Finance Initiative (PFI): interest: pre-trading

S330 Corporation Tax Act 2009

Interest payable under a loan relationship that is recognised for Corporation Tax purposes in a pre-trading accounting period, is a non-trading debit under the loan relationship legislation (see BIM64295 onwards and CFM32100).

However, provided the debit under the loan relationship:

  • would have been treated as an allowable trading expense if it had been given for the first accounting period in which a trade is actually carried on, and
  • an election is made within two years of the end of the pre-trading accounting period in which it is actually recognised,

the non-trading debit is treated for Corporation Tax purposes as if it was a trading debit of the accounting period in which the company begins to trade (see example 1 at BIM64335).

Therefore, an interest debit recognised for Corporation Tax purposes in a pre-trading period, e.g. because it is debited to a fixed capital asset or project on the balance sheet (see BIM64295), is either the subject of an election and allowed as a deduction in the first period of trading, or is treated as a non-trading debit of the pre-trading accounting period. Therefore no further trading deduction in respect of such interest is allowed in succeeding trading periods, e.g. as it is written off to the profit and loss account or matched against income.

We accept that where a PFI property is a fixed asset for tax purposes it falls within the definition of ‘fixed capital project’, whether reported as a fixed asset or a financial asset for accounting purposes.

Interest payable in a pre-trading accounting period that is recognised for Corporation Tax purposes in a later trading period, e.g. because the interest is debited to a finance debtor that is not a fixed capital project, is not a pre-trading expense and the above rules are not applicable. Relief for such an interest debit is given when it is matched against income credited to the finance debtor. Whether or not it is an allowable deduction for trading purposes in that period will depend upon whether it is trade interest; if not it will be a non-trading debit of the period.