BIM64145 - Private finance initiative (PFI): accounting and tax: income and expenditure recognition: example 2

A private sector 'operator', whose trade includes the provision of design, construction and maintenance services, enters into a PFI contract with a public sector 'purchaser' to build a street lighting system and maintain it for 30 years. The trade commences when the PFI agreements are signed (see BIM64065). In return the operator receives an annual service payment, the 'unitary charge', which commences after the system is completed.

Accounting period 1

The street-lighting system is completed during the first accounting period.

For tax purposes, the design and construction costs are revenue expenditure. The system is not a fixed capital asset of the operator's trade (see BIM64025 onwards). For accounting purposes the example assumes that it is reported as a finance debtor on the operator's balance sheet, under FRS5 'Application note F', at a figure of £90m representing cost (see BIM64070 onwards).

A unitary payment of £15m is receivable in the accounting period.

For tax purposes the £15m is trading income for the provision of services. For FRS5 accounting purposes, £7m represents a 'part payment' of the finance debtor and £8m represents 'operating income'.

For accounting purposes, a figure representing accrued finance income, i.e. notional 'interest', on the finance debtor is calculated at £4m and credited to the profit and loss account. The corresponding debit is to the finance debtor (see BIM64125).

The 'part payment' of £7m is then credited to the finance debtor and the 'operating income' of £8m is credited to the profit and loss account.

For tax purposes we follow the accounting recognition of income in the profit and loss account, subject to any over-riding statutory or case law principle.

The £8m 'operating income' and the £4m notional 'interest' are the recognition of trading income of the accounting period for tax purposes.

However, £3m of the £7m 'part payment' credited to the finance debtor will never be reflected in the profit and loss account. For tax purposes, the £3m is a trading receipt for the provision of services and is therefore included as an addition in the trading profits computation (see BIM64125). The proportion of the finance debtor, against which the £3m 'part payment' is matched, represents revenue construction costs and is therefore included as a deduction in the trading profits computation (see BIM64130).