Co-operative Group Limited – Annual report – 1 January 2022
Industry: retail, financial
What does this show? Our tax charge is made up of current and deferred tax. This note explains how those items arise. Additional explanatory footnotes are included to explain the key items. We were re-accredited with the Fair Tax Mark during 2021 and the additional disclosures we provide are in line with best practice guidance.
The tax on the Group’s net profit before tax differs from the theoretical amount that would arise using the standard applicable rate of corporation tax of 19% (2020: 19%) as follows:
The net tax charge of £25m on a continuing profit before tax of £57m gives an effective tax rate of 45%, which is higher than the standard rate of 19%. The main reasons for the increase are the impact of restating deferred tax following the announcement of the Corporation Tax rate change enacted in the 2021 Budget and depreciation on non-qualifying assets, being tax debits of £13m and £11m respectively. See footnotes (vii) and (x) for more detail. Off-setting this, as noted in foot note (ii), was a non-taxable accounting credit taken to the income statement on the final settlement of the Co-operative Bank group relief creditor which reduces the effective tax rate after the above items by 33%.
Tax expense on items taken directly to consolidated statement of comprehensive income or consolidated statement of changes in equity
Of the tax taken directly to the consolidated statement of comprehensive income, £66m charge (2020: £15m credit) arises on the actuarial movement on employee pension schemes. There is also a £62m charge (2020: £15m charge) being the impact of rate change on the deferred tax related to the employee pension schemes. A further £2m charge arises on investment property movement through other comprehensive income. Following the disposal of CISGIL last year there is no longer any movement in respect of Insurance assets held at fair value.
Following last year’s Budget, on 3 March 2021, the Chancellor announced the enacted corporation tax rate of 19% would increase to 25% with effect from 1 April 2023. To the extent the above deferred tax assets and liabilities are expected to crystalise after this date they should be valued using 25% rather the current corporation tax rate of 19%. The bulk of the deferred tax assets and liabilities, as shown in Note 15, are expected to crystalise over a much longer time frame, being mainly the retirement benefit obligations, capital allowances on fixed assets and unrealised gains on investment properties, rolled-over gains and historic business combinations. An assessment of the amount of deferred tax assets and liabilities that are expected to crystalise prior to 1 April 2023 is considered to be immaterial when compare to total net deferred tax liability, being less than 2% of the total amount. Due to this assessment being based on projected forecasts and the potential uncertainties inherent in using these, utilising a flat rate of 25% is seen as a fair approximate and has been used to determine the actual net deferred tax liabilities.
The impact of recognising the net deferred tax liabilities at 25% rather than 19% has increased the liability by £75m of which £62m has been charged to equity and the remaining £13m has been charged to the income statement.
We publish our tax policy on our website (https://www.co-operative.coop/ethics/tax-policy) and have complied with the commitments set out in that policy.
Footnotes to taxation note 8:
i) The Group is not tax-paying in the UK in respect of 2021 due to the fact it has a number of brought forward capital allowances (£184m gross claimed in 2021) and tax losses (£5m gross utilised in 2021) that offset its taxable profits for the period. These allowances and losses are explained in more detail in Note 15.
The disclosure in this year’s tax note has been extended to show separately the reconciliation of both current tax and deferred tax year as we believe this conveys a greater transparency and understanding to the reader of these financial statements. More detail on these reconciling items are included within footnote (x).
The current tax charge nets to nil, but disclosure requirements related to taxation arising on discontinued operations require the tax impact of discontinued operations to be split out resulting in a £1m tax charge and £1m tax credit in continuing and discontinued respectively.
Outside of the UK, our Isle of Man resident subsidiary, Manx Co-operative Society, a convenience retailing business in the Isle of Man showed a small profit in 2021, giving rise to a small current tax liability of £0.2m (2020: £0.3m). This is the Group’s only non-UK resident entity for tax purposes, which employs 116 part-time and 149 full-time colleagues out of our total Group headcount figure. All other income in the consolidated income statement is generated by UK activities and all other colleagues are employed in the UK.
The audited 2021 revenue of Manx Co-operative Society is £38m and all other revenue reflected in the consolidated income statement is generated by UK trading activities. The audited net assets of Manx Co-operative Society at 1 January 2022 were £12m, compared to net assets of the consolidated Group of £2,939m. The Manx assets represent the only overseas trading assets within the Group. A full copy of the most recent accounts is available here https://www.co-operative.coop/investors/rules. The presence of this IOM resident subsidiary has not resulted in any additional tax charge in 2021 over and above that payable to the Isle of Man authorities stated above. If these activities had been carried out in the UK, these profits would have been included within the Group’s taxable profit prior to the availability of capital allowances and tax losses.
In addition the Group has one dormant company registered in the Cayman Islands, Violet S Propco Limited. This is a legacy dormant company and is UK resident for tax purposes, as it is managed and controlled entirely within the UK. All tax obligations in respect of this company are therefore reported in the UK. It should be noted that we have engaged with the Cayman Counsel and are in the process of completing the relevant due diligence that will allow the commencement of the formal striking off of Violet S Propco Ltd as a Cayman Isle registered company.
ii) The Group held a creditor balance in relation to group relief claimed from The Co-operative Bank PLC (‘the Bank’) (see Note 22). Group relief is the surrender of tax losses made by one group company to another which made taxable profits. In 2012 and 2013, the Bank had tax losses that it was able to surrender to a number of Co-op Group companies which had taxable profits during those two years. This group relief payable was linked to and held at prevailing tax rates. Due to the enacted rate change in 2020 from 17% to 19% the creditor balance was remeasured increasing the total liability by £16m, being the charge shown in the 2020 comparatives.
As noted in last year’s financial statements, as a non-adjusting post balance sheet event, in February 2021 the Bank agreed a full and final settlement of £48m as payment for the losses it had group relieved to Co-op Group, extinguishing the liability of £147m as carried on Group’s balance sheet. The accounting gain of £99m arising from this, shown in the income statement, is not subject to corporation tax in accordance with UK tax legislation.
iii) There was minimal adjustment in respect of the current year in respect of prior years for both 2021 and 2020.
iv) Deferred tax is an accounting concept that reflects how some income and expenses can affect the tax charge in different periods to when they are reflected for accounting purposes. These differences are a result of tax legislation.
The £5m deferred tax charge represents the net utilisation of temporary differences throughout the current year that are offset against the Group’s taxable profits, reducing the Group’s current tax liabilities. The current year charge of £5m primarily relates to deferred tax arising on movements on our pension assets. Note 15 gives further detail on how each deferred tax balance has moved in the year.
As the Group is not tax-paying in respect of 2021, the reconciling items between the tax charge at the standard rate and the actual tax charge mostly affect the deferred tax we carry as they will result in us having more or less capital allowances or losses to offset against future profits.
v) There was a £6m tax charge adjustment in the current year relating to prior years. This resulted from changes to the taxable profits reported in the individual subsidiary accounts compared to the Group’s tax charge as a whole in 2020. In 2020 there was minimal adjustment in respect of prior years.
It is common for adjustments to arise in respect of prior years, as the tax charge in the financial statements is an estimate that is prepared before the detailed tax calculations are required to be submitted to HMRC, which is 12 months after the year end. When HMRC may not agree this can give rise to uncertainties for which a provision is recognised. Where this gives rise to uncertainties a provision is recognised. Following recent agreement with HMRC on prior year issues we no longer carry any uncertain tax positions.
vi) Some expenses incurred by the Group may be entirely appropriate charges for inclusion in its financial statements but are not allowed as a deduction against taxable income when calculating the Group’s tax liability. Examples of this include some repairs, entertaining costs and certain legal costs.
vii) The accounting treatment of depreciation differs from the tax treatment. For accounting purposes an annual rate of depreciation is applied to capital assets. For tax purposes the Group is entitled to claim capital allowances, a relief provided by law. Some assets do not qualify for capital allowances and no relief is available for tax purposes on these assets. This value represents depreciation arising on such assets (primarily Land and Buildings).
viii) In 2021 the Group disposed of its shares in Co-operative Care Limited. The disposal falls within the substantial shareholder exemptions (SSE) which means any gain or losses arising on the disposal are not brought into tax. The amount shown for 2020 was in connection to the disposal of shares in CIS General Insurance Limited that was also covered by SSE.
ix) During the year a number of properties were sold, where the taxable profit is in excess of the accounting profit.
x) It is a requirement to measure deferred tax balances at the substantively enacted corporation tax rate at which they are expected to unwind. As noted above the net impact of rate change on deferred tax balances recognised through the income statement is £13m this year.
Income tax on the profit or loss for the period is made up of current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in reserves, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
15 Deferred taxation
What does this show? Our tax charge is made up of current and deferred tax as explained in note 8. We show a net asset or net liability in the balance sheet to reflect our deferred tax. This note shows how those items are calculated and how they affect the income statement. Additional explanatory footnotes are included to explain the key items.
Deferred income taxes are calculated on all temporary differences under the liability method using an effective tax rate of 25.0% (2020: 19.0%). Temporary differences arise because sometimes accounting and tax requirements mean that transactions are treated as happening at a different time for accounting purposes than they are for tax purposes.
Following last year’s Budget, on 3 March 2021, the Chancellor announced the enacted corporation tax rate of 19% would increase to 25% with effect from 1 April 2023. To the extent the above deferred tax assets and liabilities are expected to crystalise after this date they should be valued using 25% rather the current corporation tax rate of 19%. The bulk of the above assets and liabilities are expected to crystalise over a much longer time frame, being mainly the retirement benefit obligations, capital allowances on fixed assets and unrealised gains on investment properties, rolled-over gains and historic business combinations. The amount that any of the remainder are expected to crystalise prior to 1 April 2023 is partial dependent on project forecasts and considered to be relatively small in terms of the entire net deferred tax liabilities, being less than 2% of the total amount. Due to the potential uncertainties in using project forecasts and the overall amounts involved a flat rate of 25% has been used to determine the actual net deferred tax liabilities.
The impact of recognising the net deferred tax liabilities at 25% rather than 19% has increased the liability by £75m of which £62m has been charged to equity as part of the Retirement benefit obligations above and the remainder of £13m has been charged to the income statement.
i) This amount includes deferred tax liabilities that arose on the acquisition of Nisa Retail Limited in 2018 and the adoption of IFRS 9, also in 2018. These are offset by a deferred tax asset in respect of provisions. Expenses that have not yet been incurred are able to be recorded in the accounts as provisions. However, of these certain expenses don’t receive tax relief until they have been paid for and so the related tax relief is delayed to a future period.
ii) This amount represents the theoretical future tax cost to the Group in respect of the current pension scheme surplus. The overall increase in 2021 was £213m. This is primarily due to the impact of the rate change going from 19% to 25%, leading to a £136m increase in the liability. In addition there is a £76m increase in liability for the movement in the total schemes’ surpluses during the year.
iii) A deferred tax asset arises on capital allowances where the tax value of assets is higher than the accounts value of the same fixed assets. The reason the Group has a higher tax value for these fixed assets is due to the fact the Group has not made a full claim to its maximum entitlement to capital allowances since 2013 due to reduced levels of trading profits in the intervening years. However, impairment, disposals and depreciation have continued to reduce the accounts value for our assets. The Group expects to use these allowances to reduce future trading profits. The £72m increase in the asset over the year is mainly due to the £80m impact of the rate change.
iv) This amount represents the theoretical amount of tax that would be payable by the Group on (a) the sale of all investment properties, (b) the sale of properties that have been restated at their fair value on historic mergers and transfers of engagements and (c) the sale of any property that has had an historic capital gain ‘rolled into’ its base cost (which is an election available by statute designed to encourage businesses to reinvest proceeds from the sale of trading properties into new trading properties and ventures). The £30m increase in the liability over the year is mainly due to the £37m impact of the rate change.
v) The Group has incurred trading losses and interest losses that were in excess of taxable profits in the past. These losses can be used to reduce future trading profits and capital gains which are included in future tax forecasts for the Group. The restriction on the amount of losses that can be used in any one year post 1 April 2017, being £5m plus 50% of any surplus taxable profits above this amount, is not expected to limit the use of these losses other than extend the time over which they will be claimed.
The increase in asset of £4m represents is mainly due to £5m impact from the rate change less £1m in respect of amounts offset against taxable profits this year.
vi) Deferred tax that arose on the adoption of IFRS 16 in 2019 will unwind over a number of years and reduce taxable profits in those future years. The increase in asset of £10m is mainly due to £13m impact from rate change less £3m in respect of the unwind during the year.
vii) This movement is made up of a net £5m current year movements as explained in footnotes (i) to (vii) above plus £6m prior year adjustments and £14m impact from rate change, see Note 8 for more detail.
Deferred tax is provided for, with no discounting, using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profits, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available to use the asset against. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.