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Treatment of Taxes, Subsidies and Transfer Payments

Treatment of Taxes and Subsidies
2.5.29Goods and services procured by government should generally be costed gross of tax and subsidies. The ideal would be to assess all options net of tax and subsidies, but this is not generally straightforward and in most cases the costs of options can be compared gross of tax and subsidies without biasing the appraisal. In practice it is rarely worthwhile to adjust market prices for taxes or subsidies.
2.5.30However, in some circumstances it will be appropriate to consider adjusting for taxes and subsidies. For instance, adjustment may be necessary where land is subsidised - see 2.5.38 and 2.5.52 below. The need to make adjustment arises primarily where the tax structures of options differ very substantially in nature, such that failure to allow for differing tax treatment could distort the choice of best option.
2.5.31This is particularly relevant when appraising proposals under the Private Finance Initiative (PFI), because the contractor is subject to a different tax treatment than a public provider. Departments should follow the detailed HM Treasury guidance on the required adjustments in PFI cases (see 5.4.15 below).
2.5.32It is important to adjust for any tax differences between options arising from different contractual arrangements, such as in-house supply versus buying-in, or lease versus purchase. For example, when considering contracting out a service that was previously provided in-house, at least a part of the tax payable by the contractors and their funders would not have been paid under a "do minimum" option of continued in-house provision.
2.5.33It is common practice to remove VAT from costs. This is important where the adjustment may make a material difference, for example where different options attract different VAT conventions (such as when comparing new build with refurbishment). In other cases, adjusting for VAT is less important.
2.5.34

Where VAT or any other tax or subsidy is excluded from an appraisal, this fact should be noted in the appraisal report. In such cases, the excluded tax or subsidy should be accounted for appropriately in any separate financial or PE appraisal.

Treatment of Transfer Payments
2.5.35A transfer payment is one for which no good or service is obtained in return. Social security payments are an example. They may change the distribution of income but they do not of themselves represent direct economic costs, except for any associated costs of administration or compliance. Transfer payments should be excluded from the costs and benefits in an appraisal, but recorded separately and taken into account in analysis of PE or exchequer costs.

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