4.5.1 Early PFI projects were often structured by way of lease and lease back with the Contractor, such that construction expenditure in the Contractor would be capital, qualifying, where appropriate, for capital allowances tax relief. Under this treatment, part of the Unitary Charge is treated as rental income in the Contractor. Typically, as much of the expenditure by the Contractor is on buildings not qualifying for capital allowances, tax relief is limited.
4.5.2 PFI/PF2 projects are now commonly structured by way of licence (enabling the Contractor to do no more than go on to the land to perform the construction works and Services) rather than lease and lease back, with a view to allowing the Contractor to become eligible for composite trade tax treatment. Under composite trade tax treatment all Contractor expenditure on the Project may be treated as being trading expenditure and thereby, in principle, wholly eligible for tax relief as an allowable trade deduction. This may give tax relief to design and construction expenditure that would not otherwise qualify.
4.5.3 The facts of each case must of course be considered, but as a general guide, in order for composite trade tax treatment to apply, the Contractor must show that it has a trade of design and construction services (as well as the Services it provides once the Project is up and running). The Contractor must have no lease in the Project land (only a lesser right of access) and no rental income derived from the land, as such an interest in the land would give the Contractor a capital asset from which it was deriving an income and would disqualify the Contractor from composite trade tax treatment.