11 Tax
a Tax on profit on ordinary activities
Tax charged in the income statement relating to continuing operations
| Group | ||
|---|---|---|
| £ million | 2008 | 2007 |
| Current income tax (continuing operations) | ||
| UK corporation tax | 72 | 171 |
| Relief for foreign tax paid | (2) | (5) |
| Advance corporation tax credit | (47) | (22) |
| UK tax | 23 | 144 |
| Foreign tax | 1 | 1 |
| Adjustments in respect of prior years – UK corporation tax | (8) | (14) |
| Adjustments in respect of prior years – overseas tax | (10) | |
| Total current income tax charge (continuing operations) | 16 | 121 |
| Deferred tax | ||
| Effect of the change in the rate of UK corporation tax on opening balances | (76) | |
| Property, plant and equipment related temporary differences | (57) | (74) |
| Pensions | 237 | 178 |
| Unremitted earnings of associated companies | 5 | |
| Advance corporation tax charge/(credit) | 47 | (52) |
| Share option deductions written back | 5 | 2 |
| Other temporary differences | (2) | (12) |
| Adjustments in respect of prior years | 12 | 10 |
| Total deferred tax charge (continuing operations) | 171 | 52 |
| The deferred tax charge in the year has been calculated at a rate of 30 per cent on items reversing during the year and at 28 per cent on items creating a new deferred tax balance at March 31, 2008. | ||
| Tax charge in the income statement (continuing operations) | 187 | 173 |
| Tax credit relating to discontinued operations (note 5a) | (24) | |
| Total tax charge in the income statement | 187 | 149 |
Tax charged/(credited) directly to equity
| Group | ||
|---|---|---|
| £ million | 2008 | 2007 |
| Current tax | ||
| Current income tax credit to reserves relating to exercise of share options | (17) | |
| Deferred tax | ||
| Deferred tax on net movement on revaluation of cash flow hedges charge/(credit) | 67 | (41) |
| Deferred tax on foreign exchange in reserves (credit)/charge | (21) | 41 |
| Deferred tax on share options in issue charge/(credit) | 7 | (1) |
| Corporation tax rate change for items charged directly to reserves | (6) | |
| Tax charge/(credit) taken directly to equity | 47 | (18) |
b Reconciliation of the total tax charge
The tax charge for the year on the profit from continuing operations is less than the notional tax charge on those profits calculated at the UK corporation tax rate of 30 per cent (2006/07: 30 per cent).
The differences are explained below:
| Group | ||
|---|---|---|
| £ million | 2008 | 2007 |
| Accounting profit before tax from continuing operations | 883 | 611 |
| Accounting profit multiplied by standard rate of corporation tax in the UK of 30 per cent (2006/07: 30 per cent) | 265 | 183 |
| Effects of: | ||
| Provision for the settlement of competition investigations | 105 | |
| Non-deductible expenses | 5 | 2 |
| Untaxed profits on disposals charge/(credit) | 1 | (17) |
| Tax effect arising from associates’ profits being disclosed on an after tax basis | (7) | (1) |
| Tax on associates’ unremitted earnings | 2 | |
| Accounting effect of preference share minority interest | (4) | (4) |
| Adjustments in respect of prior years charge/(credit) | 4 | (14) |
| Recognition of previously written-off advance corporation tax | (74) | |
| Other differences | (5) | (7) |
| Effect of corporation tax change in income statement deferred tax movement | 2 | |
| Effect of corporation tax change on opening deferred tax balances | (76) | |
| Total tax charge for the year on profit from continuing operations (note 11a) | 187 | 173 |
c Deferred tax
The deferred tax included in the balance sheet is as follows
| Group | Company | |||
|---|---|---|---|---|
| £ million | 2008 | 2007 | 2008 | 2007 |
| Fixed asset related temporary differences | 1,105 | 1,213 | 1,019 | 1,124 |
| Pensions | (56) | (291) | (54) | (289) |
| Exchange differences on funding liabilities | 68 | 97 | 67 | 97 |
| Advance corporation tax | (47) | (72) | (47) | (72) |
| Tax losses carried forward | (1) | |||
| Tax on subsidiary and associated companies unremitted earnings | 18 | 8 | 4 | 2 |
| Tax on fair value profits recognised on cash flow hedges | 78 | 11 | 78 | 11 |
| Tax on share options | (3) | (15) | (3) | (15) |
| Other temporary differences | (8) | (21) | 5 | (3) |
| 1,154 | 930 | 1,069 | 855 | |
Movement in provision
| Group | Company | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Balance at April 1 | 930 | 896 | 855 | 792 |
| Deferred tax charge relating to profit arising from continuing operations (note 11a) | 171 | 52 | 167 | 64 |
| Deferred tax credit relating to loss arising from discontinued operations (note 5a) | (25) | |||
| Deferred tax charge/(credit) reported directly in reserves (note 11a) | 47 | (1) | 47 | (1) |
| Deferred tax relating to sold companies (note 5c) | 8 | |||
| Deferred tax charge arising on acquisition of equity in Iberia | 3 | |||
| Revaluation of foreign currency balances | 3 | |||
| Balance at March 31 | 1,154 | 930 | 1,069 | 855 |
d Factors that may affect future tax charges
The Group has unutilised UK capital losses of £198 million (2006/07: £217 million). These losses can be carried forward indefinitely and offset against any future UK chargeable gains that may arise. No deferred tax asset has been recognised in respect of these capital losses as their utilisation is not currently anticipated. The Group has made £69 million (2006/07: £100 million) of rollover relief claims that have reduced the tax basis of fixed assets. No deferred tax liability has been recognised in respect of the potential tax liability arising from these claims as they could be offset by the UK capital losses carried forward.
The Group has now fully recognised its advance corporation tax surplus brought forward of £94 million. £47million of the asset has been offset against UK corporation tax liabilities for the years to March 31, 2008. The remainder of the asset (£47 million) has been recognised as a deferred tax asset at March 31, 2008 as it is anticipated that the advance corporation tax will be offset against UK corporation tax liabilities within the foreseeable future.
Deferred tax has been provided on the unremitted earnings of associate companies where it is not considered that the Group can control the timing or manner of the reversal of the temporary difference associated with such earnings. In addition, deferred tax has been provided for tax arising on dividends expected to be paid by the Group’s overseas subsidiaries in the foreseeable future. If the retained earnings of other overseas subsidiary companies were to be remitted to the parent company by way of dividend, the temporary differences upon which the Group has not provided for deferred tax would be £19 million (2006/07: £18 million).
The UK corporation tax rate reduced from 30 per cent to 28 per cent from April 1, 2008. This rate change will affect the amount of future cash tax payments to be made by the Group and has also reduced the size of the Group’s balance sheet deferred tax liability at March 31, 2008.
The Finance Bill 2008 proposed that from April 1, 2008 the rate of capital allowances applicable to plant and machinery expenditure will be reduced from 25 per cent to 20 per cent per annum on a reducing balance basis and the rate of allowances applicable to long-life assets increases from 6 per cent to 10 per cent also on a reducing balance basis. If enacted, these changes to the capital allowance rates will impact the rate at which tax relief is received on expenditure on new aircraft as the Group currently applies the agreement between the British Airline Transport Association and the UK tax authorities under which such expenditure is treated as half plant and machinery and half long-life asset.
The Finance Bill 2008 also proposed the phased abolition of industrial buildings allowances by March 31, 2011. It is estimated that the abolition of these tax allowances will cost the Group £79 million of future tax relief. This number is subject to adjustment if the Group makes substantial acquisitions or disposals of buildings that qualify for industrial buildings allowances before March 31, 2011. At the balance sheet date this proposed change in legislation was still subject to parliamentary agreement and its accounting effect, which will be an increase in the Group’s net deferred tax liability, will not be reflected in the Group’s financial statements until the legislation has been substantively enacted.