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A private sector operator enters into a PFI contract with a public sector purchaser to lease residential accommodation to the purchaser for 25 years. In addition, the operator is to provide non-ancillary support services for the accommodation, and the purchaser’s existing housing stock, for the duration of the contract. »Ê¹ÚÌåÓýapp support trade commences immediately (see BIM64065). »Ê¹ÚÌåÓýapp operator builds the houses 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 residential accommodation is completed during the accounting period.

For tax purposes the design and construction costs of the accommodation are capital expenditure. »Ê¹ÚÌåÓýapp accommodation is a fixed capital asset of the operator’s property business (see BIM64025 onwards). For accounting purposes the example assumes that the accommodation is reported as a finance debtor on the operator’s balance sheet, under FRS5 Application Note F (see BIM64070 onwards). »Ê¹ÚÌåÓýapp construction costs, including £5m interest on the construction loan, are shown as debited direct to the finance debtor on the balance sheet during the construction period, at a figure of £75³¾ representing cost.

-	-	Amount	-	-	Amount
Dr	Finance debtor (construction costs and interest)	£75³¾	Cr	Bank	£75³¾

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 accommodation (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	£ 3m

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 trade profits and property income computations (see BIM64125).

»Ê¹ÚÌåÓýapp proportion of the finance debtor, against which the £3³¾ credit is matched, represents capital construction costs and non-trade interest, since the loan is for the construction of a property used in a property business. Neither of these is an allowable deduction of the business for tax purposes (see BIM64295). No adjustment is required in the tax computations.

»Ê¹ÚÌåÓýapp interest is a non-trading debit to a fixed capital project and the fixed capital asset or project rule applies. 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 deficit period.

Tax computation	-	Trading income	Property income	Non-trade deficit
Income	£12³¾	-	-	-
Plus part payment	£3³¾	-	-	-
Profit (before overheads)	£15³¾	£13³¾	£2³¾	(£5³¾)