Adjustment to provision for tax following EU Commission decision on State Aid and UK Controlled Foreign Company regime and HMRC charging notice and appeals made

D S Smith Plc – Annual report – 30 April 2021

Industry: manufacturing

4. Adjusting items (extract)

Adjusting tax items – 2020/21

The current tax credit on adjusting items of £11m in the year ended 30 April 2021 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 divestments.

The adjusting tax item of £5m includes a net decrease in the State Aid provision of £2m primarily in relation to the estimate of interest on overdue tax following agreement reached with HM Revenue & Customs (“HMRC”) (see note 7) and the release of a US tax provision of £3m relating to the Plastics business that is no longer due.

7. Income tax expense (extract)

Uncertain tax positions

The Group operates in a complex multinational tax environment and is subject to uncertain tax positions and changes in legislation in the jurisdictions in which it operates. The Group’s uncertain tax positions principally include pricing of cross-border transactions and a limited number of specific transaction related tax risks.

The assessment of uncertain tax positions is based on management’s expectation of the likely outcome of settlements with tax authorities or litigation. The quantification of the risks at any one point in time, especially with respect to transfer pricing, requires a degree of judgement and estimation by management.

Within the consolidated balance sheet at 30 April 2021 for continuing operations are current tax liabilities of £133m (30 April 2020: £149m) which include a provision of £116m (30 April 2020: £138m) relating to uncertain tax positions. It is possible that amounts paid will be different from the amounts provided and the Group estimates the range of reasonably possible outcomes relating to uncertain tax positions to be from £25m to £199m.

Following the EU Commission’s decision in April 2019 which concluded that up until 31 December 2018, the UK Controlled Foreign Company legislation partially represented State Aid, the Group recognised a provision in the year ended 30 April 2019 through adjusting items for the maximum potential exposure of £33m, which included an estimate of £2m for interest on overdue tax. During the year, the Group received a charging notice from HMRC under The Taxation (Post Transition Period) Bill for the full exposure. After the offset of deferred tax assets the cash tax liability was reduced to £18m (including interest), which was paid after the end of the accounting period. An amount of £2m is credited to adjusting items in the year being the difference between the provision and the final assessment liability (including the utilisation of deferred tax assets).

The Group has filed an application with the General Court of the European Court of Justice for the EU Commission’s decision in respect of State Aid to be annulled. An appeal against the charging notice received from HMRC following detailed analysis conducted supporting the Group’s position has also been filed. The appeals are not expected to conclude in the next 12 months.

There are tax audits being conducted by the tax authorities in a number of countries. Whilst there is inherent uncertainty regarding the timing of the resolution of these tax audits and the final tax liabilities to be assessed, the Group does not expect there to be a material change in the provision for uncertain tax positions in the next 12 months.

Included within the current tax liabilities is an amount of £9m (30 April 2020: £11m) relating to interest and penalties on uncertain tax positions.