Notes to the consolidated financial statements – analysis of items in the primary statements

1. Segmental analysis	10. Earnings per share	19. Trade and other receivables
2. Other operating income	11. Goodwill	20. Cash and cash equivalents
3. Operating costs	12. Other intangible assets	21. Borrowings
4. Exceptional items, remeasurements and stranded cost recoveries	13. Property, plant and equipment	22. Trade and other payables
5. Pensions and other post-retirement benefits	14. Other non-current assets	23. Other non-current liabilities
6. Finance income and costs	15. Financial and other investments	24. Provisions
7. Taxation	16. Deferred tax assets and liabilities	25. Share capital
8. Discontinued operations	17. Derivative financial instruments	26. Reconciliation of movements in total equity
9. Dividends	18. Inventories and current intangible assets	27. Consolidated cash flow statement

7. Taxation

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

	2008 £m	2007 £m	2006 £m
Taxation before exceptional items, remeasurements and stranded cost recoveries*	583	442	369
Exceptional tax item – deferred tax credit arising from the reduction in UK tax rate	(170)	–	–
Taxation on other exceptional items, remeasurements and stranded cost recoveries*	198	(1)	166
Taxation on total exceptional items, remeasurements and stranded cost recoveries (note 4)*	28	(1)	166
Total tax charge	611	441	535

Taxation as a percentage of profit before taxation

	2008 %	2007 %	2006 %
Before exceptional items, remeasurements and stranded cost recoveries*	31.7	29.7	27.0
After exceptional items, remeasurements and stranded cost recoveries	27.9	25.2	31.1

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

	2008 £m	2007 £m	2006 £m
United Kingdom
Corporation tax at 30% (2007: 30%; 2006: 30%)	214	66	269
Corporation tax adjustment in respect of prior years (i)	(156)	(28)	(8)
Deferred tax	42	168	6
Deferred tax adjustment in respect of prior years (ii)	67	9	(6)
	167	215	261
Overseas
Corporate tax	213	109	122
Corporate tax adjustment in respect of prior years	31	(149)	23
Deferred tax	191	207	158
Deferred tax adjustment in respect of prior years	9	59	(29)
	444	226	274
Total tax charge	611	441	535

*Comparatives have been adjusted to present items on a basis consistent with the current year classification

(i) The UK corporation tax adjustment in respect of prior years includes a £9m charge (2007: £51m credit; 2006: £nil) that relates to exceptional items, remeasurements and stranded cost recoveries.

(ii) The UK deferred tax adjustment in respect of prior years includes a £2m charge (2007: £5m credit; 2006: £nil) that relates to exceptional items, remeasurements and stranded cost recoveries.

Taxation on items charged/(credited) to equity

	2008 £m	2007 £m	2006 £m
Corporate tax credit on share-based payments	(7)	(2)	–
Deferred tax (credit)/charge on available-for-sale investments	(2)	1	1
Deferred tax (credit)/charge on revaluation of cash flow hedges	(2)	10	(20)
Deferred tax charge/(credit) on share-based payments	12	(11)	(7)
Deferred tax charge on actuarial gains	98	70	62
	99	68	36
Total tax charge recognised in consolidated statement of recognised income and expense	94	81	43
Total tax charge/(credit) relating to share-based payments recognised directly in equity (note 26)	5	(13)	(7)
	99	68	36

The tax charge for the year after exceptional items, remeasurements and stranded cost recoveries is lower (2007: lower; 2006: higher) than the standard rate of corporation tax in the UK (30%). The differences are explained below:

	Before exceptional items, remeasure-ments and stranded cost recoveries 2008 £m	After exceptional items, remeasure-ments and stranded cost recoveries 2008 £m	Before exceptional items, remeasure-ments and stranded cost recoveries 2007 £m	After exceptional items, remeasure-ments and stranded cost recoveries 2007 £m	Before exceptional items, remeasure-ments and stranded cost recoveries 2006 £m	After exceptional items, remeasure-ments and stranded cost recoveries 2006 £m
Profit before taxation
Before exceptional items, remeasurements and stranded cost recoveries*	1,839	1,839	1,486	1,486	1,369	1,369
Exceptional items, remeasurements and stranded cost recoveries*	–	353	–	265	–	349
Profit before taxation from continuing operations	1,839	2,192	1,486	1,751	1,369	1,718
Profit on continuing operations multiplied by rate of corporation tax in the UK of 30% (2007: 30%; 2006: 30%)	552	658	446	525	410	515
Effects of:
Adjustments in respect of previous years	(60)	(49)	(53)	(109)	(16)	(12)
Expenses not deductible for tax purposes	102	117	44	111	84	108
Non-taxable income	(75)	(51)	(61)	(154)	(178)	(180)
Adjustment in respect of foreign tax rates*	26	68	22	70	19	58
Impact of share-based payments	2	2	9	9	(5)	(5)
Remeasurement of deferred tax – change in UK tax rate	–	(170)	–	–	–	–
Other	36	36	35	(11)	55	51
Total taxation from continuing operations	583	611	442	441	369	535
	%	%	%	%	%	%
Effective income tax rate	31.7	27.9	29.7	25.2	27.0	31.1

*Comparatives have been adjusted to present items on a basis consistent with the current year classification

Factors that may affect future tax charges

During the year, as a result of the change in the UK corporation tax rate from 30% to 28% that will be effective from 1 April 2008, the UK deferred tax expected to reverse has been measured using the 28% tax rate.

A number of changes to the UK corporation tax system were announced in the March 2008 Budget Statement and are expected to be enacted in the 2008 Finance Act. These include changes to the industrial building allowance regime. The changes have not been substantively enacted at the balance sheet date and therefore are not included in these financial statements. However, the impact of the changes to the industrial building allowance regime is expected to have a £40m tax charge impact.

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