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5. Taxation

(a) Tax expense

Analysis of charge in year 2008
Current tax charge/(credit)    
  Current year 33 38
  Utilisation of previously unrecognised tax losses and other assets (44) (9)
  Adjustments in respect of prior years 1 3
  Net movement on provisions for uncertain tax positions 4
  (10) 36
Deferred tax charge/(credit)    
  Origination and reversal of temporary differences (excluding post-employment obligations) (69) 12
  Tax in respect of post-employment obligations (5) (3)
  Tax on change in value of derivative financial instruments (2)
  Utilisation of previously unrecognised tax losses and other assets (7)
  Other changes in unrecognised deferred tax assets 80 (28)
  Changes in tax rates (2) (8)
  Adjustments in respect of prior years (2) (1)
Total tax charge/(credit) for the year (10) 1
Tax in respect of restructuring, impairments and derivative financial instruments included above    
  Current tax (credit)/charge (3) (7)
  Deferred tax (credit)/charge (4) 2
  (7) (5)
Tax in respect of utilisation of previously unrecognised losses against foreign exchange gains and losses on intra-group funding included above    
  Current tax (credit)/charge (29)

The Group is required to estimate the income tax due in each of the jurisdictions in which it operates. This requires an estimation of the current tax liability together with an assessment of the temporary differences which arise as a consequence of differing accounting and tax treatments. These temporary differences result in deferred tax assets or liabilities which are measured using substantively enacted tax rates expected to apply when the temporary differences reverse. Recognition of deferred tax assets, and hence credits to the income statement, is based on forecast future taxable income and therefore involves judgement regarding the future financial performance of particular legal entities or tax groups in which the deferred tax assets are recognised.

The Group is subject to many different tax jurisdictions and tax rules as a consequence of its geographic spread. It is therefore subject to tax audits and tax reviews which, by their nature, are often complex and can require several years to conclude. The total accrual for income tax in any period is, therefore, based on management judgement, interpretation of country specific tax law and the likelihood of crystallisation and settlement. Tax benefits are not recognised unless it is probable that the tax positions are sustainable. As amounts set aside in any period could differ from actual tax liabilities, adjustments may be required in subsequent periods which may have a material impact on the Group’s income statement and/or cash tax payment. Payments in respect of tax liabilities for an accounting period comprise payments on account and payments on the final resolution of open items with tax authorities and, as a result, there can be substantial differences between the charge in the income statement and cash tax payments. Interest on provisions for uncertain tax positions is, where relevant, provided for in the tax charge.

Details of the effective tax rate for the Group and the underlying events and transactions affecting this are given in the business review

  2008 2007
Tax reconciliation £m % £m %
Profit/(loss) before tax (130)   199  
Less share of post-tax earnings of joint ventures (6)   (24)  
Profit/(loss) before tax excluding joint ventures (136)   175  
Tax (credit)/charge calculated at 28.5% (2007 – 30.0%) standard UK corporate tax rate (39) 29 53 30
Differences between UK and overseas corporate tax rates (10) 7 5 2
Non-deductible and non-taxable items 11 (8) (8) (4)
Utilisation of previously unrecognised tax losses and other assets (44) 32 (16) (9)
Other changes in unrecognised deferred tax assets 80 (59) (28) (16)
Changes in tax rates (2) 1 (8) (4)
Deferred tax (credit)/charge in respect of post-employment obligations (5) 4 (3) (1)
Current year tax charge/(credit) on ordinary activities (9) 6 (5) (2)
Net movement on provision for uncertain tax positions 4 2
Adjustments in respect of prior years (1) 1 2 1
Total tax charge/(credit) for the year (10) 7 1 1

(b) Tax in equity

Tax on items included in equity (credit)/charge 2008
Deferred tax on post-employment obligations 84
Deferred tax on non-qualifying assets (3) 6
Deferred tax on foreign exchange gains and losses on intra-group funding (3) 2
Current tax on foreign exchange gains and losses on intra-group funding 29
  23 92

(c) Current tax

United Kingdom 2
Overseas 17
  17 2
Overseas (115) (104)
  (115) (104)

(d) Recognised deferred tax

Deferred tax is calculated in full on temporary differences under the liability method.

Deferred tax assets 52 56
Deferred tax liabilities (63) (75)
  (11) (19)

The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) during the period are shown below:

  Assets Liabilities Total
Tax losses
Fixed assets

At 1 January 2007 102 20 28 (94) (5) 51
Included in the income statement 3 27 45 (31) (9) 35
Included in equity (84) (6) (2) (92)
Subsidiaries acquired (2) (6) (8)
Other movements (6) 6
Currency variations 2 (7) (5)
At 31 December 2007 21 47 69 (140) (16) (19)
Other movements 11 (11)
Included in the income statement 5 (29) (19) 34 9
Included in equity 3 3 6
Currency variations 7 20 37 (63) 1 2
At 31 December 2008 44 27 87 (166) (3) (11)

Deferred tax assets totalling £14 million (2007 – £35 million) have been recognised relating to territories where tax losses have been incurred in the year. It is anticipated that future profitability arising from restructuring and other actions will result in their realisation.

(e) Unrecognised deferred tax assets

Deferred tax assets have not been recognised in relation to certain taxable losses and other temporary differences on the basis that their future economic benefit is uncertain. The gross and tax values of these unrecognised assets together with any expiry dates where relevant are shown below. The tax value of the assets has been calculated using tax rates enacted or substantively enacted at the balance sheet date.

  2008 2007
  Tax value
Tax value
Tax losses — with expiry: national 300 867 2019–2028 186 532 2019–2027
Tax losses — with expiry: local 44 532 2009–2028 40 813 2008–2027
Tax losses — without expiry 66 202   118 402  
Other temporary differences 71 215   32 113  
Unrecognised deferred tax assets 481 1,816   376 1,860  

Included above are tax losses of £756 million with a tax value of £187 million (2007 – £677 million with a tax value of £109 million) that are severely restricted for future use and management, based on the Group’s current profile, believes they are unlikely to be utilised in the foreseeable future.

No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of such profits is planned. If the earnings were remitted in full tax of £28 million (2007 – £25 million) would be payable.

(f) Franked Investment Income — Litigation

In September 2003 GKN filed a claim in the High Court of England and Wales (‘the High Court’) in respect of various Advance Corporation Tax payments made and Corporate Tax paid on certain foreign dividend receipts which, in its view, were levied by HMRC in breach of GKN’s EU community law rights. GKN joined a Group Litigation Order (‘GLO’) with several other claimants and a test case was selected from the members of the GLO to proceed to trial on a representative basis.

At the commencement of that trial in June 2004 the High Court referred the test case to the European Court of Justice (‘ECJ’) for guidance on the issues raised. In December 2006 the ECJ issued its guidance to the High Court and the test case returned to the High Court for the full trial in July 2008. The High Court issued its judgment on 27 November 2008.

The November High Court judgment held in favour of the claimants on certain key aspects of the claim. Both parties, however, have appealed to the Court of Appeal and depending upon the outcome of this a further reference to the ECJ may be required before the issue is ultimately resolved. Given the importance of the matters at issue it is expected that appeals will ultimately be taken to the House of Lords and that this process may take several more years to complete. Given the complexity of the case and uncertainty over the issues raised it is not possible to predict with any reasonable degree of certainty what the final outcome could be. The range of possible outcomes is so wide that it is potentially misleading to quote any estimates of the possible recoveries at this stage. As a result no contingent asset has been recognised and disclosed in these financial statements.

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