Chapter BIM64275
| Published date | 22 November 2013 |
| Record Number | BIM64275 |
| Court | HM Revenue & Customs |
A private sector operator, whose trade includes the provision of design, construction and maintenance services, enters into a PFI contract with a public sector purchaser, to build a hospital and maintain it for 25 years. The construction costs are financed by a bank loan. The trade commences when the PFI contract is signed (see BIM64065). In return the operator receives an annual service payment, the unitary charge, which commences after the hospital is completed.
Accounting period 1Construction of the hospital is completed at the end of the first accounting period.
For tax purposes the design and construction costs are revenue expenditure (see BIM64025 onwards). For accounting purposes the example assumes that SSAP9 ‘Stock and long-term contracts’ principles are adopted during the construction period. The construction costs, including £5m interest on the loan, are debited to the work-in-progress (WIP) account and a sale is recognised on completion of the hospital at the end of the accounting period. For accounting purposes the hospital is therefore reported as a finance debtor on the operator’s balance sheet (see BIM64125), under FRS5 Application Note F (see BIM64070 onwards).
| Dr | WIP account (construction costs and interest) | £75m | Cr | Bank | £75m |
| Dr | P&L account (cost of sales) | £75m | Cr | WIP account | £75m |
| Dr | Finance debtor | £75m | Cr | P&L account (sale) | £75m |
No income is receivable in the first accounting period.
For tax purposes we follow the accounting recognition of income and expenditure in the profit and loss account, subject to any relevant over-riding statutory or case law principle.
The sale is therefore recognised for tax purposes and the debits for construction costs and interest are allowable. No adjustment is required in the trading profits computation.
| Trading income computation | |
| Income (net of construction costs and interest) | £0 |
| Profit (before overheads) | £0 |
In the second...
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