IAS 12 paras 81(c), 81(g) tax reconciliation and deferred tax balances with detailed explanatory notes

Co-operative Group Limited – Annual report – 31 December 2017

Industry: retail, financial

  1. Taxation

In plain English – what does this note show?

Our tax charge is made up of current and deferred tax – this note explains how those items arise. Current tax is the tax arising on the taxable income for the year, whereas deferred tax relates to future periods. Additional explanatory footnotes are included (on the following page) to help better explain the key items. The Group was re-accredited with the Fair Tax Mark during 2017, and the additional disclosures are in line with best practice guidance.

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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 19.25% (2016: 20%) as follows:

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The net tax charge of £2m on a profit before tax of £72m, gives an effective tax rate of 3%, which is 16.25% lower than the standard rate of 19.25%. The majority of this difference can be explained by two principal items. Firstly, there was a £4m reduction in the amount payable to the Bank in respect of group relief, representing 5% of the difference (see footnote (ii) overleaf). The remaining 11% is in respect of the sale of food stores to McColls Retail Group. Tax legislation dictates that the tax charge on this disposal is triggered in 2016, being the date in which the contract was signed. This differs to the accounting treatment, where the disposal is recognised in 2017, being the period in which the properties were transferred out of the Group.

Tax expense on items taken directly to consolidated statement of comprehensive income

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Of the tax taken directly to the consolidated statement of comprehensive income, £45m credit (2016: £81m charge) relates to deferred taxation credit of £44m (2016: £91m charge) arising on the actuarial movement for the year, net of a credit of £nil (2016: £13m) relating to the restatement of deferred tax rates on the pensions scheme surplus. *For more details on the restatement, refer to the general accounting policies note on page 165. Furthermore, there is a £1m credit representing the movement in deferred taxation on available for sale assets in General Insurance (2016: £3m charge). See note 13 on deferred tax.

The Finance Act 2016 will reduce the main rate of corporation tax to 17% from 1 April 2020. This will reduce the company’s future current tax charge accordingly. Each deferred tax balance has been measured individually based on the tax rate at which it is expected to unwind (either 17%, 18% or 19%). This results in a blended deferred tax rate of 17.1% at the balance sheet date.

Tax policy

The Group published its Tax Policy on our website https://www.co-operative.coop/ethics/tax-policy. The Group have complied with the commitments set out in that policy.

Footnotes to taxation note 8:

i) The Group is not taxpaying in the UK in respect of 2017 due to the fact it has a number of brought forward capital allowances (£187m gross claimed in 2017) and tax losses (£29m gross utilised in 2017) that are in excess of its taxable profit for the period. These allowances and losses are explained in more detail at Note 13. An amount of current tax of £265k (2016: £253k) is in respect of wholly owned IOM resident subsidiary, Manx Co-operative Society, an entity undertaking convenience retailing in the Isle of Man. This is the Group’s only non UK resident entity for tax purposes, which employs 246 out of our total Group headcount figure. All other employees are employed in the UK. The unaudited 2017 revenue of Manx Co-operative Society is £34m, all other Revenue reflected in the consolidated income statement is generated by UK trading activities. The unaudited 2017 profit before tax of Manx Co-operative Society is £2m, all other income in the consolidated income statement is generated by UK trading activities. The net assets of Manx Co-operative Society at December 2016 were £19m, compared to net assets of the consolidated Group of £3,209m. The Manx assets represent the only overseas assets within the Group. A full copy of the most recent accounts is available here https://www.co-operative.coop/downloads/manx-co-operative-2016-accounts.pdf. The presence of this IOM resident subsidiary has resulted in this additional tax charge of £265k. If these activities had been carried out in the UK, any taxable profits would have been reduced to nil due to the availability of capital allowances and tax losses. In addition the Group has one company registered in the Cayman Islands, Violet S Propco Limited. This dormant company 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.

ii) The Group holds a creditor balance in relation to group relief claimed from the Bank (see note 18). 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 Group companies which had taxable profits during those two years. This group relief payable is intrinsically linked to and held at prevailing tax rates to 17%. As a result of the change in tax legislation regarding the utilisation of losses, the timing of the total group relief payable has extended into periods when the tax rate will be 17% and a credit is required to be booked in the income statement in respect of this item. In addition a contractual agreement was made to reduce payments due to the Bank by £4m in July 2017 and a credit for reduction in amounts payable has been booked.

iii) Adjustments to tax charges in earlier years arise because 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. Furthermore, HMRC may not agree with a tax return some time after the year end and a liability for a prior period may arise as a result. Provisions for uncertain tax positions booked in previous years of £0.5m have been released in the year as a result of increased certainty gained through correspondence with HMRC during 2017.

iv) Deferred taxation is an accounting standard concept that reflects how certain income and expenses fall into the charge to tax in differing periods from the accounting period than the period the original income or expense arose. These differences are a result of tax legislation. Notes 13 and 16 explain how each deferred tax balance has moved in the year.

v) In addition to the adjustments arising between prior year estimates and submissions to HMRC, the Group ascertained on the original purchase cost information on deferred tax balances arising on land and buildings. More detail is provided in note 13.

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 certain repairs, entertaining costs and 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 taxation purposes the Group is entitled to claim capital allowances, a relief provided by law. Certain 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 2017 the Group disposed of its shareholdings in Gisland Spa Ltd, White Mill Windfarm Ltd, Biggleswade Windfarm Ltd, TCCT UK Holdings Ltd and Co-operative Bank Plc. No tax arose on the accounting profit due to the availability of the Substantial Shareholding Exemption. This is a legislative exemption from capital gains for corporate entities who sell more than 10% of their shares in a trading entity.

ix) In 2016, the investment held in the Co-operative Bank Plc was impaired, which attracted no tax relief. No such impairment has been made this year.

x) This represents the share of post-tax profits from associated companies that are not included in the Group’s tax charge, as tax is already included in the accounts of the associate.

xi) During the year a number of assets were sold, where the tax value is in excess of the accounting profit. The most significant element of this figure relates to NOMA following the sale of the JV’s interest in the CIS Tower Miller Street and disposal of the investment in this partnership.

xii) It is a requirement to measure deferred tax balances at the substantively enacted corporation tax rate at which they are expected to unwind. This figure represents the change in the tax rate identified in 2017 at which these deferred tax balances are expected to unwind.

Accounting policies

Income tax on the profit or loss for the period comprises 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.

  1. Deferred taxation

In plain English – what does this note show?

Our tax charge is made up of current and deferred tax as explained in note 8. Current tax is the tax arising on the taxable income for the year whereas deferred tax arises in relation to future periods. We show an asset and a liability in the balance sheet to reflect these deferred items. This note shows how those items are calculated and how they affect the year’s consolidated income statement. Additional explanatory footnotes to help better explain the key items.

Deferred income taxes are calculated on all temporary differences under the liability method using an effective tax rate of 17.1% (2016: 17.1%).

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*See general accounting policies section on page 165 for details of the restatement.

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*See general accounting policies section on page 165 for details of the restatement.

The Finance Act 2015 reduced the main rate of corporation tax to 19% from 1 April 2017 and the Finance Act 2016 will further reduce the main rate of corporation tax to 17% from 1 April 2020. This will reduce the company’s future current tax charge accordingly. Each deferred tax balance has been measured individually based on the tax rate at which it is expected to unwind (either 17% or 19%) by reference to forecast taxable profits for the Group. This results in a blended deferred tax rate of 17.13% at the balance sheet date, as the majority of the deferred tax provisions will be required and utilised in periods after April 2020.

Footnotes:

i) Certain expenses that have not yet been incurred are able to be recorded in the accounts as a provision. However, such expenses do not receive tax relief until they have been paid for. As such the related tax relief is deferred to a future period.

ii) This amount represents the theoretical amount of tax that would be payable by the Group on the wind up of the Pension Scheme. A £30m net credit has been recognised during 2017. £44m of this net credit has been recognised in OCI, which is offset by a charge of £14m taken to the income statement.

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 excess trading losses arising in recent years. However, impairment, disposals and depreciation have continued to be charged against the equivalent accounts value. The Group expects to utilise these allowances against future trading profits. A credit of £6m has arisen during 2017 in respect of differences in prior year estimated provisions and submissions made to HMRC in respect of our 2015 and 2016 accounting periods during 2017.

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 Fair Valued on historic mergers and transfers of engagements and (c) the disposal 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 corporates to reinvest disposal proceeds from the disposal of trading properties into new trading properties and ventures). During 2017 the Group has collated a significant proportion of the original base costs and March 1982 valuations for properties fair valued on historic mergers. These reviews have created a net £2m deferred tax charge which is included in the prior year deferred tax movement in note 8.

v) This value arises from the claims equalisation reserve that is required by statute to be taxed in CIS General Insurance Limited, but no accounts value is required to be recognised for accounting purposes. From 1 January 2016 this balance no longer had to be held, and is being released evenly over a six year period. It also includes the amount of tax that is expected to be due on assets available for sale that are currently held on the balance sheet.

vi) The Group incurred trading losses and interest losses that were in excess of taxable profits in the past. These losses can be utilised against future trading profits and capital gains which are included in future tax forecasts for the Group. A provision of £8m included in this balance is in respect of uncertain tax positions, which is in respect of enquiries HMRC have opened in respect of March 1982 valuations used for capital gains purposes. In the event of an adjustment to the valuations used an offset would arise in losses held by the Group.

vii) This movement is made up of current years movements as explained in footnotes (i) to (vi) above and a prior year adjustment. The net effect of the prior year adjustments in each of the above items is a credit of £4m, comprising of a charge of £2m on the collation of base costs as per footnote (iv) above, offset by a £3m credit on capital allowances and a £3m credit on future capital gains and rollover relief.

viii) In 2016, 298 food stores that were to be sold to McColls Retail Group plc were held within assets held for sale (see note 16). The associated deferred tax liabilities relating to capital allowances were transferred to assets held for sale. During 2017, these stores have been disposed of and a deferred tax credit of £5m has been released to the income statement, which is included within the current year deferred tax charge of £9m.

Accounting policies

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 for utilisation. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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*See general accounting policies section on page 105 for more details of the restatement.

The Finance Act 2015 will reduce the main rate of corporation tax to 19% from 1 April 2017 and the Finance Act 2016 will further reduce the main rate of corporation tax to 17% from 1 April 2020. This will reduce the company’s future current tax charge accordingly. Each deferred tax balance has been measured individually based on the tax rate at which it is expected to unwind (either 17% or 19%) by reference to forecast taxable profits for the Group. This results in a blended deferred tax rate of 17.14% at the balance sheet date, as the majority of the deferred tax provisions will be required and utilised in periods after April 2020.

Footnotes:

i)  Certain expenses that have not yet been incurred are able to be recorded in the accounts as a provision. However, such expenses do not receive tax relief until they have been paid for. As such the related tax relief is deferred to a future period.

ii) This amount represents the theoretical amount of tax that would be payable by the Group on the wind up of the Pension Scheme. A £27m credit has been recognised during 2016 as a result of an assessment of the future tax rates dropping to 17%. £13m of this credit has been recognised in OCI and £6m has been recognised in the prior year deferred tax credit in the income statement and a credit of £8m has been recognised within the current year deferred tax credit in the income statement.

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 for the last 4 years. However, impairment, disposals and depreciation have continued to be charged against the equivalent accounts value. The Group did not make its full entitlement claim due to the fact there were excess trading losses arising in the Group in recent years. The Group expects to utilise these allowances against future trading profits. A credit of £19m has arisen during 2016 in respect of differences in prior year estimated provisions and submissions made to HMRC in respect of our 2014 and 2015 accounting periods during 2016.

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 fair valued on historic mergers and transfers of engagements (c) the disposal 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 corporates to reinvest disposal proceeds from the disposal of trading properties, into new trading properties and ventures. During 2016 the Group has re-assessed the basis of calculating the deferred tax arising on fair valued historic mergers on a ‘dual basis’ methodology, which has required a more detailed analysis of the records that support the future expected taxable gains. These reviews have created a net £11m deferred tax charge which is included in the prior year deferred tax movement in note 8.

v) This value arises from the claims equalisation reserve that is required by statute to be taxed in CIS General Insurance Limited, but no accounts value is required to be recognised for accounting purposes. From 1 January 2016 this balance no longer has to be held, and will be released equally over six years, starting in 2016. It also includes the amount of tax that is expected to be due on assets available for sale that are currently held on the balance sheet.

vi) The Group incurred trading losses and interest losses that were in excess of taxable profits in the past. These losses can be utilised against future trading profits and capital gains which are included in future tax forecasts for the Group. An amount of £6m included in this balance in respect of a re-allocation of provisions in respect of uncertain tax positions from current tax to deferred tax. In addition, this provision has been increased to £8m during 2016, which is in respect of enquiries HMRC have opened in respect of March 1982 valuations used for capital gains purposes. In the event of an adjustment to the valuations used an offset would arise in losses held by the Group.

vii) 298 food stores that will be sold to McColls Retail Group plc are held within assets held for sale (see note 16). The associated deferred tax liabilities relating to capital allowances have been transferred to assets held for sale. The Group incurred trading losses and interest losses that were in excess of taxable profits. These losses can be utilised against future trading profits and capital gains and as such represent a deferred tax asset.

viii) A deferred tax asset in respect of capital allowances was de-recognised and included in the profit and loss on disposal arising on the sale of Somerfield Stores Limited.

ix) The net effect of the prior year adjustments in each of the above items is a credit of £4m, comprising of credits of £6m on pensions rate change drops and £19m on capital allowances, offset by charges of £10m in respect of uncertain tax positions under HMRC review and £11m in respect of changes arising on the review of deferred tax arising on future capital gains and rollover relief.

Accounting policies

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 for utilisation. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are only offset to the extent the Group is able to realise assets and settle liabilities at the same time.

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