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A private sector operator enters into a PFI contract with a public sector purchaser to lease a fully equipped hospital extension to the purchaser for 25 years. In addition, the operator is to provide non-clinical support services for the existing hospital, and the extension, for the duration of the contract. »Ê¹ÚÌåÓýapp support trade commences immediately (see BIM64065). »Ê¹ÚÌåÓýapp operator builds the extension on land it acquires for the purpose, the construction costs being financed by a bank loan. In return, the operator receives an annual service payment, the unitary charge.

Accounting period 1

Construction of the hospital extension is completed during the accounting period.

For tax purposes the design and construction costs of the extension are capital expenditure. »Ê¹ÚÌåÓýapp hospital extension is a fixed capital asset of the operator’s property business (see BIM64035 onwards). For accounting purposes the example assumes that the extension is reported as a finance debtor on the operator’s balance sheet, under FRS5 Application Note F (see BIM64070 onwards). »Ê¹ÚÌåÓýapp construction costs are shown as debited direct to the finance debtor on the balance sheet during the construction period, at a figure of £75³¾ representing cost. Interest on the construction loan, of £5³¾, is debited to the profit and loss account.

-	-	Amount	-	-	Amount
Dr	Finance debtor	£75³¾	Cr	Bank	£75³¾
Dr	P&L account (interest)	£5³¾	Cr	Bank	£5³¾

A unitary payment of £15³¾ is receivable in the first accounting period. »Ê¹ÚÌåÓýapp example assumes that £2³¾ of the payment is for the provision of the hospital (property business) and £13³¾ for the provision of support services (trading).

For accounting purposes £12³¾ is credited to the profit and loss account (being notional interest on the finance debtor and operating income) and £3³¾ is credited to the finance debtor.

-	-	Amount	-	-	Amount
Dr	Bank	£15³¾	Cr	P&L account	£12³¾
-	-	-	Cr	Finance debtor	£3³¾

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.

»Ê¹ÚÌåÓýapp £3³¾ credited to the finance debtor is business income and is included as an addition in the trading income and property income computations (see BIM64125).

»Ê¹ÚÌåÓýapp proportion of the finance debtor, against which the £3³¾ credit is matched, represents capital construction costs. No adjustment is required in the tax computations.

»Ê¹ÚÌåÓýapp interest debited to the profit and loss account is a non-trading debit, since the loan is for the construction of a property for a property business, and is added back in the tax computations. If there are no other non-trading credits or debits of the period arising from the company’s loan relationships, this creates a non-trading deficit which can, for example, be set off against any profits of the company for the accounting period.

Tax computation	-	Trading Income	Property Income	Non-trade deficit
Income (net of interest)	£ 7m	-	-	-
Plus part payment	£ 3m	-	-	-
Non-trade interest	£ 5m	-	-	-
Profit (before overheads)	£15³¾	£13³¾	£2³¾	(£5³¾)