BIM64295 - Private finance initiative (PFI): interest: non-trade

For CT purposes, where a company is a party to a loan relationship otherwise than for the purposes of a trade carried on by it, interest payable under that relationship is not brought into account as an expense of any trade. Nor is it treated as an expense of a property business. It is a 'non trading debit' under the loan relationship legislation (FA96/S82 (3)(b)).

The non-trading debits and credits in respect of a loan relationship are aggregated with all other debits and credits arising from a company's non-trading loan relationships:

• in accounting periods beginning before 1 October 2002, non-trading profits and losses on foreign exchange (FA93/S129 and FA93/S130) and financial instruments (FA94/S160), and
• in accounting periods beginning on or after 1 October 2002, non-trading credits or debits on derivative contracts (FA02/SCH26/PARA14).

An overall net surplus is charged to tax as Interest. An overall net deficit, i.e. a 'non-trading deficit', may be relieved in a variety of ways in accordance with FA96/S83 and FA96/SCH8 (see CTM50800 onwards and CFM5311 onwards).

An interest debit in an accounting period in respect of a loan relationship is taken into account, whether posted to a fixed capital asset, a financial asset, or the profit and loss account (FA96/S82 and FA96/S84 (1)(b)).

Relief will normally be available for corporation tax purposes when a non-trade interest debit is made:

• to the profit and loss account and is not subsequently 'capitalised' (see example 1 at BIM64305), or
• when a non-trade interest debit is made to a finance debtor, or 'capitalised' to a finance debtor, and is then matched against income credited to the finance debtor.

The one exception is where the non-trade interest is debited, or 'capitalised', to a 'fixed capital asset or project'. FA96/SCH9/PARA14 states that such a debit is to be brought into account for corporation tax purposes in the accounting period for which it is given, in the same way as a debit is given in determining the profit or loss for that period (see example 2 at BIM64310). We accept that where a PFI property is a fixed asset for tax purposes it falls within the definition of 'fixed capital project', whether reported as a fixed asset or a financial asset for accounting purposes (see example 3 and 4 at BIM64315 and BIM64320).

Where the company is constructing a property as part of a property business and carrying on a trade, the purpose of the loan will determine whether the interest is a trading debit, a non-trading debit, or is to be apportioned between the two.

Notional interest

Where, as an accounting exercise, a figure representing accrued finance income on a finance debtor, i.e. notional 'interest', is credited to the profit and loss account (see BIM64125), neither it, nor the corresponding debit to the finance debtor, are interest on a money debt for the purposes of the loan relationship legislation.