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A private sector operator, already carrying on the trade of running a prison, enters into a PFI contract with a public sector purchaser, to provide a specific number of additional prison places for 25 years. The operator builds an extension to its existing prison on land acquired for the purpose, financed by a bank loan. In return the operator receives an annual service payment, the unitary charge, which commences after the extension has been completed.

Accounting period 1

Construction of the extension is completed at the end of the accounting period.

For tax purposes the design and construction costs are capital expenditure (see BIM64025 onwards). For accounting purposes the example assumes that SSAP9 ‘Stock and long-term contractsâ€� principles are adopted during the construction period. The construction costs, including £5³¾ interest on the loan, are debited to the work-in-progress (WIP) account and a notional sale is recognised on completion of the prison 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 (see BIM64125), under FRS5 Application Note F (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 (“saleâ€�)	£75³¾

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 extension is constructed as a fixed asset of the trade for tax purposes and not as trading stock. The sale is therefore not recognised for tax purposes. The £5³¾ interest debit is capitalised to a current asset that falls within the definition of fixed capital project (see BIM64245) and so the fixed capital asset or project rule applies. The £5³¾ interest is therefore an allowable deduction in the trading profits computation for the accounting period. The example assumes an accounting profit of £10³¾.

-	Amount
Trading income computation	-
Profit (P&L account)	£10³¾
Less interest	£5³¾
Profit	£5³¾

Accounting period 2

In the next accounting period a unitary payment of £15³¾ is receivable in respect of the additional prison places. 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 and expenditure in the profit and loss account, subject to any over-riding statutory or case law principle.

The £3³¾ credited to the finance debtor is trading income for services provided and is therefore included as an addition in the trading profits computation (see BIM64125).

The proportion of the finance debtor, against which the £3³¾ credit is matched, represents capital construction costs and trade interest that has already been relieved in accounting period 1. Neither of these is an allowable deduction in this, or future, accounting periods for tax purposes. Therefore no adjustment is required in the trading profits computation (see BIM64130).

-	Amount
Trading income computation	-
Income (recognised in P&L account)	£12³¾
Plus `part paymentâ€�	£3³¾
Profit (before overheads)	£15³¾