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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Supply: Private Finance Initiative (PFI): what is the liability?

As each PFI agreement is structured to suit the needs of a particular business each deal has to be looked at individually. However, HMRC’s current view is that where a serviced building is being supplied there is generally a single composite supply that will be exempt under VAT Act 1994, Schedule 9, Group 1.

The parties involved may choose to opt to tax to make the supply standard rated. Occupation by a section 33 and 41 bodies (eg local authorities, NHS Trusts and Government Departments) will not normally cause an option to be disapplied under the anti avoidance provision (occupation by a section 33 body for a non-business purpose and occupation by a government department is specifically excluded under the legislation from causing an option to be disapplied). However, some arrangements are described as PFI despite the fact that they don’t involve public bodies. For example, educational establishments have commonly used PFI-type agreements as a way of funding new developments. Where this is the case, and particularly where capital contributions have been made by the educational establishment to the PFI provider, the options to tax of the parties involved may be affected by the anti avoidance rules.

In certain circumstances the building supplied may satisfy the conditions for a zero-rated supply under Schedule 8, Group 5.

It is possible that there are separate supplies of the building and the services, or even that the supply of services is the dominant supply, but this only occurs in very special circumstances. To date we have only accepted that the supply of services is dominant in highly technical NHS contracts. It is not expected that services would be supplied without an interest in land also being supplied.

If a taxpayer argues that there are separate supplies, please report the case to the VAT Directorate (see Getting advice, VAT Directorate, intranet page), who will review the case and ensure a consistent approach is taken.

It is now more common for what is known as a “composite trade” structure to be used. Under this arrangement no interest in land is granted either to or by the PFI company. This means that for VAT purposes the supply consists of operation and management services in relation to the facility. Such supplies will normally be subject to standard rated VAT.