Revenue & Customs Brief 26/09

PFI and transfer pricing

On 3 March 2009, the Chief Secretary to the Treasury announced plans for a temporary intervention into the funding market for Private Finance Initiative (PFI) projects. All PFI projects that have issued an Official Journal of the European Union notice and future PFI projects as approved will be eligible.

The Government will provide debt funding alongside commercial lenders and the European Investment Bank. It will also be able, where necessary, to provide the full amount of debt required by a project. The lending will be made by a financial institution established by the Treasury, although it is intended that the loans will be sold on, prior to maturity, as market conditions ease.

Questions may arise as to whether the application of the UK transfer pricing rules could limit tax deductions for interest in respect of this type of borrowing.

The transfer pricing rules can apply where a lender is directly or indirectly participating in the management, control or capital of the borrower. While it is unlikely that the Treasury’s financial institution would be a direct participant, it is possible that in certain cases it would be treated as indirectly participating through the acting together rules (1).

This does not necessarily mean that transfer pricing adjustments on the interest deductions will be required as transactions within the scope of rules can be on arm’s length terms.

The Treasury’s financial institution will be offering the funding on commercial terms determined by market conditions. HM Revenue & Customs (HMRC) therefore consider that the lending between the Treasury’s financial institution and a PFI Special Purpose Vehicle is likely to represent a low risk in terms of transfer pricing.

HMRC's existing risk assessment guidance for PFI projects can be found at INTM568000.

(1) The provisions in Para 4A Schedule 28AA ICTA apply transfer pricing rules where “persons” (see existing guidance in INTM432060) who collectively control a company or a partnership have “acted together” in relation to the financing arrangements of that company or partnership.

Acting together, in this context, is a broad concept that applies to any circumstances that enable transactions to be made other than on an arm’s length basis. i.e. there is the potential for the result of a transaction or a series of transactions to be other than an arm’s length result.

Further information

Business International
Financial Transfer Pricing Team
3rd Floor
100 Parliament Street
London
SW1A 2BQ

By email: Daniel Berry
Telephone: 020 7147 2574

Issued 6 April 2009