Operis Tax and Accounting team observed the following key points affecting the UK’s PFI Infrastructure Programme, resulting from the UK Government’s Pre-Budget Report of Monday 24 November 2008:

Fast-tracking of Project

In respect of PFI projects the pre-Budget report announced “The Government remains strongly supportive of the benefits Public Private Partnerships can bring to the public sector, and the pipeline of future PFI deals is strong: £21.3 billion worth of projects are due to be signed over the coming years. As part of supporting world-class public services, and the infrastructure on which they are based, the Government will continue to deliver on the objectives set out in the Budget 2008 document Infrastructure procurement: delivering long-term value. Over the short term, the Government is working with procuring authorities and departments to ensure that they are able to close PFI projects during the current difficult conditions in the banking market.”

VAT Reduction and Trading Loss Carry Back

The reduction in the standard rate of VAT from 17.5% to 15% between 1 December 2008 and 31 December 2009 will also ease cash outflows for projects. Furthermore, any PFI companies making trading losses will generally be able to carry back these losses for up to 3 years rather than the current one year. For companies, these new rules will apply for accounting periods ending between 24 November 2008 and 23 December 2009. The one-year loss carry back remains unlimited, whereas the carry back to earlier periods is capped at £50,000.

Interest Deductions

There is a potential downside for interest deductions on some PFI deals. The pre-budget report proposes to exempt the taxation of foreign dividends and it is expected that this will be put forward in the Finance Bill 2009 for medium and large sized businesses, subject to some restrictions. To compensate the Exchequer, a worldwide debt cap on interest has been announced. This is expected to restrict UK interest deductions by reference to a group’s external finance costs, and could impact UK PFI groups. There are a number of possible approaches to how this will be implemented. The comparison with group consolidated interest is likely to be on a net basis, and therefore interest income would be netted against interest expense. (The interest cap proposals are likely to negatively impact UK groups that have upstream loans where external debt is borrowed entirely in the UK). Draft legislation will be published in December 2008 for consultation.

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