Uncertain tax positions, policy, estimates, quantification of provisions

Senior PLC – Annual report – 31 December 2020

Industry: manufacturing

Financial review (extract)

Tax charge

The adjusted tax rate for the year was 43.5% credit (2019 – 14.5% charge), being a tax credit of £2.7m (2019 – £11.4m charge) on adjusted loss before tax of £6.2m (2019 – £78.5m profit).

The adjusted tax rate for the year benefits from the recognition of prior year adjustment credits in the US arising from measures in the US CARES Act (Coronavirus Aid, Relief and Economic Security Act) that are effective retrospectively and resulted in amendments to our prior year tax filings.

The reported tax rate was 17.4% credit, being a tax credit of £33.3m on reported loss before tax of £191.8m. This included £30.6m tax credit against items excluded from adjusted loss before tax, of which £21.7m related to the reversal of deferred tax liabilities held against goodwill impaired in the year. The 2019 reported tax rate was 1.7% credit, being a tax credit of £0.5m on reported profit before tax of £28.7m. This included the tax credit of items excluded from adjusted profit before tax of £8.3m and an exceptional non-cash tax credit of £3.6m on recognition of a deferred tax asset related to restricted interest deductions in the US.

Cash tax paid was £3.5m (2019 – £5.3m) and is stated net of refunds received of £0.3m (2019 – £0.8m) of tax paid in prior periods. Due to the phasing of corporation tax, payments during the year largely relate to taxable profits arising in the prior year and are lower than they would otherwise have been as a result of coronavirus relief measures in some countries allowing the deferral of tax bills normally due in 2020 into 2021 of £2.3m.

Tax policy

The Group acts with integrity in all tax matters, in accordance with the Group’s ethics and business conduct programme. It is the Group’s obligation to pay the amount of tax legally due and to observe all applicable rules and regulations in the jurisdictions in which it operates. While meeting this obligation, the Group also has a responsibility to manage and control the costs of our business including the taxes we pay for the benefit of all our stakeholders. The Group seeks to achieve this by conducting business affairs in a way that is efficient from a tax perspective, including maintaining appropriate levels of debt in the countries we operate in and claiming available tax reliefs and incentives. The Group is committed to building and maintaining constructive working relationships with the tax authorities of the countries in which it operates. Further details on our approach to tax may be found on Senior’s website at www.seniorplc.com.

2. Significant accounting policies (extract)

Taxation

Current tax payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the Consolidated Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the Balance Sheet date.

Provisions for uncertain tax positions are included within current tax liabilities on the Consolidated Balance Sheet representing Management’s best estimate of the likely cash outflow related to the uncertainty. There are transactions and activities that the Group engages in where the ultimate tax determination is uncertain and a provision may be made against the tax benefit. For example, the Group seeks to price transactions between Group companies on an arms length basis and in compliance with OECD transfer pricing principles and the laws of the relevant jurisdictions. The application of OECD principles and local tax laws require interpretation, and accordingly involves the application of judgement and is open to challenge by the relevant tax authorities. This gives rise to a level of uncertainty. Provisions for uncertain tax positions are established in accordance with IFRIC 23 based on an assessment of the range of likely tax outcomes in open years and reflecting the strength of technical arguments. Amounts are provided for individual tax uncertainties based on Management’s assessment of whether the most likely amount or an expected amount based on a probability weighted methodology is the more appropriate predicter of amounts that the company is ultimately expected to settle. When making this assessment, the Group utilises specialist in-house tax knowledge and experience and takes into consideration specialist tax advice from third party advisers on specific items.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the Balance Sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, including for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available for their utilisation before their expiry. Amounts will be recognised first to the extent that taxable temporary differences exist and it is considered probable that they will reverse and give rise to future taxable profits against which losses or other assets may be utilised before their expiry. Assets will then be recognised to the extent that forecasts or other evidence support the availability of future profits against which assets may be realised.

Deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of goodwill (other than in a business combination) of other assets and liabilities in a transaction that affects neither the Group’s taxable profit nor its accounting profit.

The carrying value of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted at the Balance Sheet date. Deferred tax is charged or credited in the Consolidated Income Statement, except when it relates to items charged or credited to Other Comprehensive Income or directly to Equity, in which case the deferred tax is also dealt with in Other Comprehensive Income or Equity.

Key sources of estimation and uncertainty (extract)

Income taxes

In determining the Group provisions for income tax and deferred tax, it is necessary to consider transactions in a small number of key tax jurisdictions for which the ultimate tax determination is uncertain. To the extent that the final outcome differs from the tax that has been provided, adjustments will be made to income tax and deferred tax provisions held in the period the determination is made. The carrying amount of net current tax liability and deferred tax liability at 31 December 2020 was £16.8m (2019 – £23.1m) and £0.8m (2019 – £31.1m), respectively. Further details on these estimates are set out in Notes 10 and 21.

21. Tax balance sheet (extract)

Current tax

The current tax receivable of £3.0m (2019 – £3.5m) includes excess tax paid to tax authorities that is expected to be recovered within 12 months by way of offset against future tax liabilities or refund.

The majority of the Group’s taxable profits arise in countries, including the US, where the estimated tax liabilities are paid in on-account instalments during the year to which they relate and are largely paid at the Balance Sheet date. The current tax liability of £19.8m (2019 – £26.6m) represents £0.3m (2019 – £4.1m) tax due on profits of the current and prior years as well as £19.5m (2019 – £22.5m) provisions for tax uncertainties that represent amounts expected to be paid but by their nature, there is uncertainty over timing and eventual settlement.

The Group recognises provisions for tax items which are considered to have a range of possible tax outcomes and separately accounts for interest that may be due thereon. The range of reasonably possible outcomes considered by the Board could increase those tax liabilities by £8.0m (2019 – £9.2m). These uncertainties exist due to a number of factors including differing interpretations of local tax laws and the determination of appropriate arm’s length pricing in accordance with OECD transfer pricing principles on internal transactions and financing arrangements. In calculating the carrying amount of provisions, Management estimates the tax which could become payable as a result of differing interpretations and decisions by tax authorities in respect of transactions and events whose treatment for tax purposes is uncertain. In accordance with IFRIC 23, individual provisions are established based on an assessment of whether it is the most likely individual outcome, or the expected outcome on a probability basis that is likely to best reflect the resolution of the uncertainty.