Notes to the consolidated financial statements

7. Taxation

Taxation on items charged/(credited) to the income statement

	2009 £m	2008* £m	2007 £m
Taxation before exceptional items, remeasurements and stranded cost recoveries	517	579	442
Exceptional tax items (see note 4)	49	(170)	–
Taxation on other exceptional items, remeasurements and stranded cost recoveries	(94)	198	(1)
Taxation on total exceptional items, remeasurements and stranded cost recoveries (see note 4)	(45)	28	(1)
Total tax charge	472	607	441

Taxation as a percentage of profit before taxation

	2009 %	2008* %	2007 %
Before exceptional items, remeasurements and stranded cost recoveries	29.2	31.7	29.7
After exceptional items, remeasurements and stranded cost recoveries	33.9	27.8	25.2

The tax charge for the year can be analysed as follows:

	2009 £m	2008* £m	2007 £m
United Kingdom Corporation tax at 28% (2008: 30%; 2007: 30%)	37	214	66
Corporation tax adjustment in respect of prior years (i)	(54)	(156)	(28)
Deferred tax	339	42	168
Deferred tax adjustment in respect of prior years (ii)	–	67	9
	322	167	215
Overseas Corporate tax	105	209	109
Corporate tax adjustment in respect of prior years	38	31	(149)
Deferred tax	37	191	207
Deferred tax adjustment in respect of prior years	(30)	9	59
	150	440	226
Total tax charge	472	607	441

*

Comparatives have been restated for the finalisation of the fair value exercise on the acquisition of KeySpan Corporation (see note 28)

(i)

The UK corporation tax adjustment in respect of prior years includes a £2m credit (2008: £9m charge; 2007: £51m credit) that relates to exceptional items, remeasurements and stranded cost recoveries.

(ii)

The UK deferred tax adjustment in respect of prior years includes a £1m charge (2008: £2m charge; 2007: £5m credit) that relates to exceptional items, remeasurements and stranded cost recoveries.

Taxation on items (credited)/charged to equity

	2009 £m	2008 £m	2007 £m
Corporation tax credit on share-based payments	(2)	(7)	(2)
Deferred tax (credit)/charge on available-for-sale investments	(7)	(2)	1
Deferred tax (credit)/charge on revaluation of cash flow hedges	(19)	(2)	10
Deferred tax charge/(credit) on share-based payments	3	12	(11)
Deferred tax (credit)/charge on actuarial (losses)/gains	(678)	98	70
	(703)	99	68
Total tax (credit)/charge recognised in the consolidated statement of recognised income and expense	(704)	94	81
Total tax charge/(credit) relating to share-based payments recognised directly in equity	1	5	(13)
	(703)	99	68

The tax charge for the year after exceptional items, remeasurements and stranded cost recoveries is higher (2008: lower; 2007: lower) than the standard rate of corporation tax in the UK of 28% (2008: 30%; 2007: 30%). The differences are explained below:

		Before exceptional items, remeasurements and stranded cost recoveries 2009 £m	After exceptional items, remeasurements and stranded cost recoveries 2009 £m	Before exceptional items, remeasurements and stranded cost recoveries 2008* £m	After exceptional items, remeasurements and stranded cost recoveries 2008* £m	Before exceptional items, remeasurements and stranded cost recoveries 2007 £m	After exceptional items, remeasurements and stranded cost recoveries 2007 £m
Profit before taxation
Before exceptional items,
remeasurements and stranded cost recoveries		1,770	1,770	1,829	1,829	1,486	1,486
Exceptional items, remeasurements
and stranded cost recoveries		–	(376)	–	353	–	265
Profit before taxation from continuing operations		1,770	1,394	1,829	2,182	1,486	1,751
Profit from continuing operations multiplied
by rate of corporation tax in the UK
of 28% (2008: 30%; 2007: 30%)		496	390	549	655	446	525
Effects of: Adjustments in respect of prior years		(45)	(46)	(60)	(49)	(53)	(109)
Expenses not deductible for tax purposes		76	82	102	117	44	111
Non-taxable income		(35)	(34)	(75)	(51)	(61)	(154)
Adjustment in respect of foreign tax rates		38	32	25	67	22	70
Impact of share-based payments		1	1	2	2	9	9
Remeasurement of deferred tax – change
in UK tax rate		–	–	–	(170)	–	–
Other		(14)	47	36	36	35	(11)
Total taxation from continuing operations		517	472	579	607	442	441
		%	%	%	%	%	%
Effective income tax rate		29.2	33.9	31.7	27.8	29.7	25.2

*

Comparatives have been restated for the finalisation of the fair value exercise on the acquisition of KeySpan Corporation (see note 28)

Factors that may affect future tax charges

A number of changes to the UK corporation tax system were announced in the April 2009 Budget Statement which are expected to be enacted in the Finance Act 2009.

The changes announced to the UK corporation tax system include temporary changes to the capital allowances regime and the introduction of a system for taxing foreign profits which is expected to bring in a dividend exemption and a worldwide debt cap.

The dividend exemption is likely to be available for both UK and foreign distributions, falling within an exempt classification, received on or after 1 July 2009. This is not expected to have a material effect on our future tax charge.

The worldwide debt cap is likely to restrict the amount of finance expense available for UK tax purposes, based on the consolidated finance expense, and is expected to apply for accounting periods ending 31 March 2011 onwards. We are in the process of evaluating the impact the worldwide debt cap will have on our future tax charge.

These changes have not been substantively enacted as at the balance sheet date and therefore have not been reflected in these financial statements.

In addition, a number of changes to the US tax system have also been signed into law as part of the US stimulus package. It is not expected that these changes will affect the Company’s overall future tax charge but, similar to the UK’s temporary changes to its capital allowances regime, they are expected to have a positive impact on the Company and its subsidiaries’ tax cash flow.

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