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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Private Finance Initiative (PFI): Capital allowances - highway undertakings - right to receive sums from a relevant authority

S341 Capital Allowances Act 2001

The industrial buildings allowance code extended to capital expenditure on the construction of a road for the purpose of, or in connection with, the exploitation of a right to receive sums from a ‘relevant authority’, because the road is to be used by the general public. See BIM64380 for details of the abolition of IBAs with effect from April 2011.

The relevant authorities include the Secretary of State, Scottish Ministers, National Assembly for Wales and the Department for Regional Development in Northern Ireland. However, it does not include local authorities.

Where a private sector operator enters into a PFI agreement, the scope of the operator’s trade needs to be established in order to determine whether expenditure on the construction of the road is capital or revenue for tax purposes (see BIM64025 onwards).

If the operator’s intention is to provide road building and maintenance services on trading account, and the facts support that contention, then the design and construction costs of the road are revenue expenditure and allowable for tax purposes. This will be the case even where an element of the unitary charge (the annual service payment) is described as a ‘shadow toll’ i.e. it is calculated on the basis of the level of road usage.

This part of the legislation was enacted at a time when there was a widespread assumption that the design and construction costs of a road were always capital expenditure for tax purposes. Where, prior to the publication of this guidance (October 2003), a PFI contract was entered into on the basis that expenditure on constructing the road was capital, and would qualify for industrial buildings allowances, HMRC will not seek to disturb this treatment, provided it is applied consistently throughout the life of the relevant contract. Any cases of doubt or difficulty should be referred to CTISA (Technical).