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NHS closes tax loophole

THE DEPARTMENT of Health has closed a tax loophole for contractors, saving it millions on the price of Private Finance Initiative hospital projects.

A new scheme being rolled out by the department means the benefit of more generous tax allowances will be passed on to NHS Trusts rather than kept by contractors that form part of special-purpose funding vehicles for PFI jobs.

The department is introducing 'contract debtor' or 'composite trader' arrangements for paying tax on most of its new PFI funded projects.

Project finance expert Sheldon Taylor, of accountant Ernst & Young, said: 'Under the old arrangements a special purpose vehicle would get a tax deduction on a percentage of the construction costs. Under contract debtor the tax deduction is for the full construction cost.'

Typically around 60 per cent of construction costs would have been non-deductible under the old arrangement.

Contractors were hoping to apply the new mechanism to increase their tax deduction allowances and boost profits.

Under new guidelines they must pass on the benefits to the Trust in the form of reduced monthly payments, which could save the client around 3 per cent.

A Department of Health source said: 'The treatment may not be suitable for all schemes but we would expect to see it being used on most of them.

Where it is not being used we will want to know why.'

If successful the model is expected to spread to PFI defence and education projects.