BIM64125 - Private Finance Initiative (PFI): accounting and tax: income and expenditure recognition: unitary charge

For tax purposes, accounts prepared according to generally accepted accounting practice are the starting point for income recognition, subject to any over-riding statutory or case law principle (see BIM30510).

A PFI contract involves a private sector operator receiving an annual sum, the ‘unitary charge’, as a payment for services. For tax purposes the unitary charge is either income of a trade, income of a property business, or income of both a property business and a separate trade (see BIM64020).

PFI property

Accounting treatment as fixed asset

Where, under FRS5 Application Note F, the costs of a PFI property are reported as a fixed asset on the operator’s balance sheet, the whole of the unitary charge will be credited to the profit and loss account over the life of the contract and the asset depreciated. We follow the accounting recognition of the income in the profit and loss account for tax purposes (see examples 1 and 4 at BIM64140 and BIM64155), subject to any over-riding statutory or case law principle.

Accounting treatment as finance debtor

Where, under FRS5 the costs of a PFI project are represented as a finance debtor on the operator’s balance sheet, the unitary charge is split into two elements for accounting purposes:

  • ‘operating income’, and
  • ‘part payment’ of the finance debtor.

The element representing operating income is credited direct to the profit and loss account. The element representing ‘part payment’ of the finance debtor is credited to the finance debtor account.

Prior to this, as a separate accounting exercise, a figure representing accrued finance income on the finance debtor for the accounting period, i.e. notional ‘interest’, is calculated and credited to the profit and loss account. The corresponding debit is to the finance debtor. This accounting ‘interest’ is not interest on a money debt for the purposes of the loan relationship legislation (see BIM64245). In practice those who prepare the accounts may net off the debit for notional interest against that element of the unitary charge credited to the finance debtor.

Both the operating income and the notional interest are the recognition of business income of the period for tax purposes and we follow the accounting recognition of these elements of income in the profit and loss account, subject to any over-riding statutory or case law principle.

However, an element of the part payment credited to the finance debtor may never be recognised, or reflected, in a profit and loss account. If this is the case, the statutory principle that the income taxed as trade profits is made on the ‘full amount’ of the profits applies (see BIM15040).

In order to compute the full amount of the profits for tax purposes, the whole of the unitary payment receivable in the accounting period has to be reflected in a trade profits or property business profits tax computation. Therefore, to the extent that it has not been recognised, and will not be recognised in a profit and loss account, the part payment credited to the finance debtor is included as income in the tax computations for the accounting period in which it is receivable (see examples 2, 5 and 6 at BIM64145, BIM64160 and BIM64165).