Exploring the different approaches to taxing PPP and PFI vehicles

Abstract

The focus of public–private partnerships (PPPs) and private finance initiatives (PFIs) remains, as it has from their inception in 1992, firmly on the provision and maintenance of public sector property assets such as schools, hospitals, social housing and civil engineering projects including ‘Design, Build, Finance and Operate’ roads. Many of the techniques used in financing PPP and PFI transactions are common to real estate projects. It is likely therefore that the tax issues and consequent solutions developed for PPP and PFI transactions will have increasing relevance to the property investment industry, particularly as the principles of PFI become more common in the private sector. The purpose of this paper is to explore the different approaches to taxing PPP and PFI project vehicles and provide an update on the latest developments in their taxation. This is a topic which has been brought into focus by the high tax rate suffered by early PFI projects which are now reaching maturity and the consequent effect this has on shareholder returns. In response, the industry has, in partnership with the Inland Revenue, sought greater certainty over the tax treatment of PPP and PFI projects. Changes to key parts of PFI contracts and the way in which services are delivered can result in a much lower effective rate of tax for PPP and PFI projects. Copyright © 2004 Henry Stewart Publications