»Ê¹ÚÌåÓýapp

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 BIM64025 onwards). For accounting purposes the example assumes that SSAP9 ‘Stock and long-term contractsâ€� principles are adopted during the construction period. »Ê¹ÚÌåÓýapp construction costs, including £5m interest on the construction loan, are debited to the work-in-progress (WIP) account and a notional sale is recognised on completion of the extension at the end of the accounting period. For accounting purposes the extension is therefore reported as a finance debtor on the operator’s balance sheet, under FRS5 Application Note F at a figure of £75³¾ representing cost (see BIM64070 onwards).

-	-	Amount	-	-	Amount
Dr	WIP account (construction costs and interest)	£75³¾	Cr	Bank	£75³¾
Dr	P&L account (cost of sale)	£75³¾	Cr	WIP account	£75³¾
Dr	Finance debtor	£75³¾	Cr	P&L account (sale)	£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 extension (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 and expenditure in the profit and loss account, subject to any over-riding statutory or case law principle.

»Ê¹ÚÌåÓýapp extension is a fixed asset of a property business, not trading stock, and therefore the notional sale is not recognised for tax purposes. »Ê¹ÚÌåÓýapp sale is therefore deducted in the tax computations. »Ê¹ÚÌåÓýapp costs of sale represent capital construction costs and non-trade interest, since the loan is for the construction of a property for a property business. Neither of these is an allowable deduction of the business for tax purposes (see BIM64295), and the whole is therefore added back in the tax computations.

»Ê¹ÚÌåÓýapp £3³¾ credited to the finance debtor is business income and is included as an addition in the tax computations (see BIM64215).

»Ê¹ÚÌåÓýapp £5m interest is a non-trading debit to a fixed capital project and so the fixed capital asset or project rule applies (see BIM64295). 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 costs of sale	£75³¾	-	-	-
Plus part payment	£3³¾	-	-	-
-	£90³¾	-	-	-
Less sale	£75³¾	-	-	-
Profit (before overheads)	£15³¾	£13³¾	£2³¾	(£5³¾)