BIM64280 - Private finance initiative (PFI): interest: trade: example 6

A private sector 'operator', already carrying on a trade of running prisons, enters into a PFI contract with a public sector 'purchaser', to provide a specific number of additional prison places for 25 years. The operator builds an extension to its existing prison on land acquired for the purpose, financed by a bank loan. In return the operator receives an annual service payment, the 'unitary charge', which commences after the extension has been completed.

Accounting period 1

Construction of the extension is completed at the end of the accounting period.

For tax purposes the design and construction costs are capital expenditure (see BIM64025 onwards). For accounting purposes the example assumes that the extension is reported as a fixed asset on the operator's balance sheet, under FRS5 'Application note F' (see BIM64070 onwards). The construction costs, including £5m interest on the loan, are shown as debited direct to the fixed asset, at a figure of £75m representing cost.

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

The £5m interest is debited to a fixed capital asset and FA96/SCH9/PARA14 applies. The £5m interest is therefore an allowable deduction in the Schedule D Case I computation for the accounting period. The example assumes an accounting profit of £10m.

Accounting period 2

In the next accounting period a unitary payment of £15m is receivable in respect of the additional prison places. For accounting purposes the whole of the unitary payment is credited to the profit and loss account. Depreciation on the fixed asset, calculated at £3m, is debited to the profit and loss account.

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

The £15m unitary payment is trading income for services provided and no adjustment is required in the Schedule D Case I computation (see BIM64125). The £3m depreciation represents capital construction costs and trade interest that has already been relieved for tax purposes under FA96/SCH9/PARA14. Neither is an allowable deduction of this, or future, accounting period for tax purposes. The whole of the depreciation is therefore added back in the Schedule D Case I computation (see BIM64130).