1.129 Tax differentials need to be taken into account when evaluating the difference between the two procurement methods. Since tax specific cashflows are not included in the Spreadsheet under the PFI Option, Procuring Authorities should use a Target Equity IRR which, based on actual experience, corresponds to the pre-tax equity IRR typically required by bidders. This will ensure that the unitary charge in the Spreadsheet is set at a post tax level.
1.130 Under the PFI Option, tax receipts by the Government will, over the life of the project, inevitably differ from those that arise under conventional procurement. Principally, tax will be payable on the differential profit earned by the private sector which compensates it for the additional level of risk being accepted under PFI. Further tax receipts can be expected to be received by the Government in respect of the returns paid to third-party funders.
1.131 An estimate should therefore be made to reflect the additional tax take that accrues to the Government under the PFI Option. The Spreadsheet does this by computing a "tax adjustment value" which is added to the Conventional Procurement in line with the Green Book. Details of the mechanic for determining the appropriate adjustment are set out in the KPMG Report in the supplementary Green Book guidance entitled "Adjusting for Taxation in PFI vs Conventional Procurement Comparisons", which is accessible from the Green Book website16. In the Spreadsheet the tax adjustment value is determined by applying a Conventional Procurement adjustment factor to the Conventional Procurement Whole Life Costs. the Conventional Procurement adjustment factor is an input in the Input sheet. In the Spreadsheet this has a Starting Value of 2%. The user should refer to section 5 of the KPMG report in the supplementary Green Book guidance entitled "Adjusting for Taxation in PFI vs PSC Comparisons". When doing so, Procuring Authorities should note that the simplifying assumption should be made that each project is on revenue account for tax purposes. It should also be noted that the Spreadsheet seeks to capture primary tax effects only. This simplistic approach is in keeping with the overall approach to the quantitative assessment.
1.132 Whilst the treatment of VAT can vary between conventionally procured projects and PFI depending on the type of services being delivered, the Green Book states that "options attracting different VAT rates should be compared as if either the same VAT payments or no VAT payments were made in all cases". For the purpose of the VfM assessment therefore no allowance should be made for any difference in VAT rates between PFI and the Conventional Procurement options. It should be noted that where VAT is not factored in to the VfM assessment, the VAT related impact will need to be reflected into the separate affordability analysis.