Imperial Brands PLC – Annual report – 30 September 2024
Industry: tobacco
2. ACCOUNTING ESTIMATES AND JUDGEMENTS (extract)
Estimates (extract)
Significant estimates
Companies are required to state whether estimates have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year. We have reviewed the items below where estimation uncertainty exists. While a number of these areas do involve estimation of the carrying value of assets or liabilities that are potentially significant within the context of the financial statements, the Group considers the probability of a significant risk of material adjustment to be low. None of these estimates are expected to present a material adjustment to the carrying amount of assets and liabilities in the next financial year. Therefore, no significant estimates are required to be disclosed.
Other estimates (extract)
Other estimates involve other uncertainties, such as those carrying lower risk, which have a smaller potential impact or would be expected to crystallise over a longer time frame than a significant estimate. These items, listed below, are only disclosed where this provides material relevant information.
Corporate income taxes
Where tax liabilities have been judged to exist, estimation is often required to determine the potential future tax payments. The Group is subject to tax in numerous jurisdictions and significant estimation is required in determining the provision for tax. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises provisions for tax based on estimates of the taxes that are likely to become due. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred tax provisions in the period in which such determination is made. Consideration of the valuation estimates related to tax provisions is given in note 8 to these financial statements.
Judgements (extracts)
Paragraph 122 of IAS 1 requires disclosure of judgements made by management in applying an entity’s accounting policies, other than those relating to estimation uncertainty. Paragraph 125 of IAS 1 requires more wide-ranging disclosures of judgements that depend on management assumptions about the future, and other major sources of estimation uncertainty (“significant judgements”).
Corporate income taxes
Judgement is involved in determining whether the Group is subject to a tax liability or not in line with tax law. The Group is subject to income tax in numerous jurisdictions and significant judgement is required in determining whether there is a liability requiring a provision for tax. Recognition of tax liabilities in situations where there is uncertainty is based on precedent in similar tax cases and external advice as to whether challenges by tax authorities are likely to result in future tax payments being made. The recognition of a tax liability involves consideration of the probability of tax authorities accepting the position taken in the tax return and there is therefore some uncertainty.
Deferred tax assets
Deferred tax assets are recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the temporary differences, losses and credits can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies. The Group has determined that it cannot recognise deferred tax assets on the temporary differences, tax losses and tax credits carried forward for certain subsidiaries. Further details of the estimates related to deferred taxes are given in note 23 to these financial statements.
8. TAX (extract)
Movement on the current tax account
The cash tax paid in the year is £303 million higher than the current tax charge (2023: £223 million lower). This arises as a result of timing differences between the accrual of income taxes and the actual payment of cash and the movement in the provision for uncertain tax positions.
Analysis of current tax account
Uncertain tax positions
As an international business the Group is exposed to uncertain tax positions and changes in legislation in the jurisdictions in which it operates. The Group’s uncertain tax positions principally include cross-border transfer pricing, interpretation of new or complex tax legislation and tax arising on the valuation of assets.
Provisions arising from uncertain tax positions taken in the calculation of tax assets and liabilities are included within current and deferred tax liabilities. At 30 September 2024 the total value of these provisions excluding offsetting assets under mutual agreement procedure was £365 million (2023: £261 million excluding offsetting assets). The assessment of uncertain tax positions is subjective and significant management judgement is required. This judgement is based on current interpretation of legislation, management experience and professional advice. Until matters are finally concluded it is possible that amounts ultimately paid will be different from the amounts provided.
Management have assessed the Group’s provision for uncertain tax positions and have concluded that apart from the matters referred to below the provisions in place are not material individually or in aggregate, and that a reasonably possible change in the next financial year would not have a material impact on the results of the Group.
French tax litigation
The Group has an ongoing challenge from the French tax authorities, which is now in litigation, and could lead to total liabilities of £254 million including tax, interest, and penalties. The challenge concerns the valuation placed on the shares of Altadis Distribution France (now known as Logista France) following an intragroup transfer of shares in October 2012 and the tax consequences flowing from a potentially higher value that is argued for by the tax authorities. In May 2023 the Administrative Tribunal of Montreuil issued its decision, ruling in favour of the French tax authorities. In July 2023 the Group appealed to the Administrative Court of Appeal of Paris, with any hearing not expected until December 2024 at the earliest. Whilst the Group has appealed, in the light of the Administrative Tribunal of Montreuil’s decision, and having subsequently reassessed the probability of a successful appeal, the Group determined it was appropriate to maintain the provision for uncertain tax positions, of which £64 million was paid in September 2024, at £111 million (30 September 2023: £180 million).
State aid UK CFC
In April 2019, the EU Commission’s final decision regarding its investigation into the UK’s Controlled Foreign Company (CFC) regime was published. It concluded that the legislation up until December 2018 partially represented state aid. The UK Government (along with a number of UK corporates, that made a similar application) appealed to the European Court seeking annulment of the EU Commission’s decision. Based, however, on the Commission’s decision and despite the appeals, the UK Government was obliged to recover the purported state aid received. In June 2022 the European General Court rejected the appeals, resulting in a subsequent appeal to the CJEU in January 2024. The CJEU handed down its decision on 19 September 2024, annulling the EU Commission decision and setting aside the judgment of the General Court, ruling that the taxation of a CFC regime did not constitute state aid. In light of the CJEU decision, the Group has now reversed a provision in order to recognise a receivable for c.£101 million state aid (and c.£9 million of interest) previously paid. Noting the recovery of the receivable is pending a change in UK regulations which is required to facilitate the repayment of the previously collected state aid.
Transfer pricing
The Group has been subject to tax audits relating to transfer pricing matters in several jurisdictions, principally UK, France and Germany. The Group holds a provision of £245 million excluding offsetting assets (2023: £68 million excluding offsetting assets) in respect of these items. In December 2021 the Group concluded a transfer pricing audit with the French tax authorities. In September 2022 the Group concluded transfer pricing audits with the UK and German tax authorities. Settlements of the French and UK audits were made during 2022. Settlement of the German audit was made during 2023. In September 2023 an additional separate transfer pricing audit was opened by the German tax authorities. Due to new regulations introduced in FY24 in Germany which could be considered to be of a clarifying nature rather than any new principle, the Group has made additional provision of £155 million considering the range of potential outcomes and the balance of probabilities associated with each potential outcome, the maximum potential exposure being £213 million. The Group believes the total transfer pricing provision held appropriately provides for this and other transfer pricing issues.
Accounts examples 