Project
The Project aims to contribute to several key areas for long-term improvements, such as integrating local transport, improving access between settlements, enhancing international connectivity, and increasing safety and security.
This £500 million scheme includes upgrading a 17.7 km stretch of road between Dowlais Top and Hirwaun in Wales from a three-lane single carriageway to a two-lane dual carriageway, with the construction of an extra 2.2 km of new road.
The South Wales project is the first PPP to be procured by the Welsh government under MIM. MIM gives the Welsh government the ability to invest up to 20% of the project’s equity in return for up to 20% of the profits and have more control over the Project’s key decisions by nominating one director to sit on the board. Other projects utilising MIM include the redevelopment of Velindre Cancer Centre in Cardiff and several Welsh schools projects.
The Project reached financial close in October 2020, with construction to be completed in 2026.
Operis role
The Tax and Accounting team provided full tax and accounting advice to one of the bidders.
The tax issues that the Team had to consider included:
- the implications of the legal structure of the SPV;
- the tax deductibility of upfront costs;
- whether stappling would be an issue; and
- the impact of Base Erosion Profit Shifting (BEPS) legislation and the Construction Industry Scheme (CIS).
In relation to the accounting treatments, there was a need to consider whether the project was within the scope of IFRIC 12 and then assess the appropriate accounting treatment to adopt within IFRIC 12, including the margins that should be applied to costs.
The Team also advised on the appropriate treatment of upfront costs, interest and fees incurred in relation to debt and compared the different ways for shareholders to extract cash from the SPV.
In addition to the areas mentioned above, there were several interesting areas to consider, given the Project’s nature and timing.
Mutual Investment Model (MIM)
The work undertaken by the tax included an analysis of the tax and accounting impacts of the MIM structure.
Domestic Reverse Charge (DRC)
The UK VAT Domestic Reverse Charge is due to be introduced in the UK from 1 March 2021, and could impact many UK infrastructure projects, including this one. The DRC could result in there being no VAT cashflows on standard and reduced rated construction services, and therefore lead to projects no longer requiring a VAT facility because there will no longer be a delay between incurring VAT on certain costs and then subsequently recovering this VAT.
Structures and Buildings Allowance (SBA) or composite trader tax treatment
Here the question was whether composite trader tax treatment or the newer SBA applied to construction expenditure. This required the Team to conduct a detailed review of the proposed transaction against HMRC guidance, including reviewing examples within the guidance to see if the fact pattern within these examples fitted the specific details of the project.
