Provision for tax following EU Commission final decision on State Aid and UK Controlled Foreign Company regime

D S Smith Plc – Annual report – 30 April 2019

Industry: manufacturing

4. Adjusting items (extract)
Items are presented as adjusting in the financial statements when they are significant items of financial performance that the Directors consider should be separately disclosed to assist in the understanding of the trading and financial results of the Group. Such items include business disposals, restructuring and optimisation, acquisition related and integration costs, and impairments. With effect from 1 May 2017, the Group has changed the description of these items from ‘exceptional’ to ‘adjusting’, to better represent their nature.

DSSmith2

2018/19
Acquisition related costs of £32m relate to professional advisory, legal and consultancy fees and directly attributable internal salary costs relating to the review of potential deals, and deals completed during the year. Of the total, £22m relates to the acquisition of Europac, with the most significant components being transaction and sponsor fees, legal costs, and financial and tax due diligence and advice costs.

Integration costs relate to integration projects underway, primarily to achieve cost synergies from the major acquisitions made in the current period and previous financial years (of which £14m relates to Europac and £9m relates to Interstate Resources). They include those directly attributable internal salary costs which would otherwise not be incurred.

On 26 October 2018, the High Court issued a judgment with respect to the equalisation between men and women of guaranteed minimum pension (GMP) benefits accrued between 1990 and 1997, in order to comply with sex discrimination legislation. The impact of this judgment was a charge of £8m for the Group.

Other restructuring costs of £3m include reorganisation and restructuring in Western Europe (£1m), and various projects commenced in the previous year.

Other adjusting items of £20m principally relate to a significant multi-year major IT project which has been substantially completed in this year. The costs of this project extend over several years and as well as adjusting items include capitalisation of intangible assets, particularly in the case of IT systems. Those costs are primarily as a result of the Group’s acquisition activity, where the businesses acquired typically have a limited IT and financial infrastructure.

Finance costs adjusting items relate to financing costs incurred in the acquisition of Europac of £7m, with the remainder relating to the unwind of the discount on the redemption liability related to the purchase of Interstate Resources.

Adjusting tax items
Adjusting tax items include the release of a provision of £32m in relation to the closure of a business in Denmark by SCA Packaging prior to ownership by the Group. This amount has been offset by a provision of £33m which represents the maximum potential tax exposure which could arise in connection with the recent decision by the EU Commission on State Aid in relation to the UK Controlled Foreign Company regime.

On 25 April 2019, the EU Commission released its final decision which concluded that up until 31 December 2018, the UK Controlled Foreign Company legislation partially represents State Aid.

There is significant uncertainty surrounding the quantum of the additional tax exposure due to a number of different factors which are likely to impact the overall State Aid collection process. To date, no formal guidance has been issued by the UK Government in relation to their likely approach to identifying and recovering any State Aid. The potential additional liability ranges from nil to £33 million depending upon the method of calculation. In view of the significant uncertainty and the broad range of possible outcomes, the Group has recognised a provision for the maximum potential exposure of £33 million, which includes an estimate of £2 million for interest on overdue tax.

The current tax credit on adjusting items of £14m in the year ended 30 April 2019 is the tax effect at the local applicable tax rate of adjusting items that are subject to tax. This excludes non-tax deductible deal related advisory fees in relation to acquisitions and disposals.

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