Annual Report 2011

Notes on the accounts

6 Taxation on ordinary activities


(a) Summary of taxation on ordinary activities

UK corporation tax credit    (16)
– current year tax expense 14 16
– adjustments in respect of prior periods    (16)
– double taxation relief (14)  (16)
Overseas tax 1,470 1,294
– current year tax expense 1,449 1,270
– adjustments in respect of prior periods 21 24
Total current tax 1,470 1,278
Deferred tax 86  (30)
– deferred tax relating to origination and reversal of temporary differences 84  (30)
– deferred tax relating to changes in tax rates 2  
  1,556 1,248


(b) Franked Investment Income Group Litigation Order

British American Tobacco is the principal test claimant in an action in the United Kingdom against HM Revenue & Customs in the Franked Investment Income Group Litigation Order (FII GLO). There are 25 corporate groups in the FII GLO. The case concerns the treatment for UK corporate tax purposes of profits earned overseas and distributed to the UK. The claim was filed in 2003 and the case was heard in the European Court of Justice (ECJ) in 2005 and a decision of the ECJ received in December 2006. In July 2008, the case reverted to a trial in the UK High Court for the UK Court to determine how the principles of the ECJ decision should be applied in a UK context.

The High Court judgment in November 2008 concluded, amongst many other things, that dividends received from EU subsidiaries should be, and should have been, exempt from UK taxation. It also concluded that certain dividends received before 5 April 1999 from the EU and, in some limited circumstances after 1993 from outside the EU, should have been treated as franked investment income with the consequence that advance corporation tax need not have been paid. Claims for the repayment of UK tax incurred where the dividends were from the EU can be made back to 1973. The tentative conclusion reached by the High Court would, if upheld, produce an estimated receivable of about £1.2 billion for British American Tobacco.

The case was heard by the Court of Appeal in October 2009 and the judgment handed down on 23 February 2010. The Court of Appeal has determined that various questions should be referred back to the ECJ for further clarification. In addition, the Court determined that the claim should be restricted to six years and not cover claims dating back to 1973. This time restriction would, if upheld, reduce the value of the claim to between zero and £10 million. Based on advice received, the Company believes it has realistic prospects of success on further appeal. The Company sought leave to appeal from the Supreme Court in the UK and the Supreme Court agreed to hear the appeal on time limits in February 2012.

Several questions were referred back to the ECJ for further clarification and a hearing took place in February 2012 at the ECJ. The courts’ decisions are awaited.

No potential receipt has been recognised in the current year or the prior year, in the results of the Group, due to the uncertainty of the amounts and eventual outcome.


(c) Factors affecting the taxation charge

The taxation charge differs from the standard 26 per cent (2010: 28 per cent) rate of corporation tax in the UK. The major causes of this difference are listed below:

 2011 2010
 £m% £m%
Profit before tax 4,931     4,388  
Less: share of post-tax results of associates and joint ventures (670)      (550)  
  4,261     3,838  
Tax at 26% (2010: 28%) on the above 1,108 26.0   1,075 28.0
Factors affecting the tax rate:          
Tax at standard rates other than UK corporation tax rate 80 1.8    (4)  (0.1)
Other national tax charges 67 1.6   77 2.1
Permanent differences 155 3.6    (10)  (0.3)
Overseas withholding taxes 143 3.4   123 3.2
Double taxation relief on UK profits (14) (0.3)    (16)  (0.4)
Unutilised tax losses        (2)  (0.1)
Adjustments in respect of prior periods 21 0.5   8 0.2
Net deferred tax credits at other tax rates (4) (0.1)    (3)  (0.1)
  1,556 36.5   1,248 32.5

Following the goodwill impairment in Turkey as explained in note 3(g) and the uncertainty of future taxable profits, the Group has written off deferred tax assets of £43 million in Turkey in 2011 (2010: £35 million). This has been treated as an adjusting item in the adjusted earnings per share calculation as set out in note 7.


(d) Tax on items recognised directly in other comprehensive income

Current tax 15  (23)
Deferred tax 5 24
Credited to other comprehensive income 20 1
The tax relating to each component of other comprehensive income is disclosed in note 20.