2.2 Taxation

Accounting policies

The tax credit for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity respectively.

Current taxation

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted by the balance sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred taxation

Deferred tax is recognised using the balance sheet liability method on temporary differences arising between the tax base of assets and liabilities and their carrying amount in the financial statements. Deferred tax is calculated at the tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Recognition, therefore, involves judgement regarding the prudent forecasting of future taxable profits of the business and in applying an appropriate risk adjustment factor. The final outcome of some of these items may give rise to material profit and loss and/or cash flow variances. At the balance sheet date management has forecast that the Group would generate future taxable profits against which existing tax losses could be relieved. As a result, the Group has recognised a deferred tax asset of £9.6 million with respect to available tax losses. The carrying amount of deferred tax assets is reviewed at each balance sheet date.

Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to offset current taxation assets against current taxation liabilities and it is the intention to settle these on a net basis.

2.2.1 Taxation — Income statement


52 weeks
ended
27 November
2011
£'000
52 weeks
ended
28 November
2010
£'000
Recognised in the income statement

Current tax:

UK corporation tax on profits of the period
Adjustments in respect of prior periods
Total current tax
Deferred tax:

Origination and reversal of temporary differences (1,920) (5,000)
Total deferred tax (1,920) (5,000)
Income tax credit (1,920) (5,000)

The tax on the Group's loss before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to losses of the Group as follows:


52 weeks
ended
27 November
2011
£'000
52 weeks
ended
28 November
2010
£'000
Loss before tax (2,423) (12,211)
Effective tax credit at the UK tax rate of 26.68% (2010: 28.00%) (646) (3,419)
Effect of:

Change in UK corporation tax rate 541
Permanent differences (27) 138
Tax losses for which no deferred tax asset recognised (3,802) (4,119)
Temporary differences on which no deferred tax recognised 2,014 2,400
Income tax credit for the period (1,920) (5,000)

As announced in the March 2011 Budget, the standard rate of corporation tax in the UK changed from 28% to 26% with effect from 1 April 2011. This reduction was in addition to the decrease to 27% enacted by the Finance Act 2010. Accordingly, the effective rate for the period is 26.68%.

The Budget also announced a further reduction in the standard rate of corporation tax from 26% to 23% phased in over three years at 1% per annum from April 2012. The change from 26% to 25% with effect from 1 April 2012 was enacted in the Finance Act 2011 and so deferred tax has been provided at 25% as the asset is expected to be realised on or after 1 April 2012. A deferred tax credit of £0.5 million has been recognised in the current period in respect of this.

Further changes have not been substantively enacted at the balance sheet date and are therefore not included in these financial statements. The proposed reductions are expected to be enacted separately each year. The overall effect of the further changes from 25% to 23%, if applied to the deferred tax balance at the balance sheet date, would be to reduce the deferred tax asset by £0.8m (being £0.4 million recognised in 2013 and £0.4 million recognised in 2014).

2.2.2 Taxation — Balance sheet

Movement in the deferred tax asset is as follows:


Tax losses carry-forwards
£'000
As at 29 November 2009 2,300
Tax losses recognised through the income statement 5,000
As at 28 November 2010 7,300
Effect of change in UK corporation tax rate (541)
Tax losses recognised through the income statement 2,856
As at 27 November 2011 9,615

Movement in the unrecognised deferred tax asset is analysed below:


Tax losses
carry-
forwards
£'000
Accelerated
capital
allowances
£'000
Share-based
payments
£'000
Derivative
financial
instruments
£'000
Other
short-term
timing
differences
£'000
Total
£'000
As at 29 November 2009 76,910 17,334 781 95,025
Effect of change in UK corporation tax rate (2,596) (707) (6) (3,309)
Potential movement in the period unrecognised through:





— Income statement (4,119) 2,459 (59) (1,719)
— Equity (109) (109)
As at 28 November 2010 70,195 19,086 607 89,888
Adjustments in respect of prior period (1,106) (2,221) (3,327)
Effect of change in UK corporation tax rate (5,217) (1,413) (44) (6,674)
Potential movement in the period unrecognised through:





— Income statement (3,803) 2,359 (445) 77 37 (1,775)
— Equity (118) (118)
As at 27 November 2011 60,069 17,811 77 37 77,994

As at 27 November 2011 the Group had approximately £279 million of unutilised tax losses (2010: approximately £287 million) available for offset against future profits. A deferred tax asset has been recognised in respect of £9.6 million (2010: £7.3 million) of such losses, the recovery of which is supported by the expected level of future profits of the Group.

No deferred tax asset has been recognised in respect of the remaining losses on the basis that their future economic benefit is uncertain given the unpredictability of future profit streams. All tax losses, both recognised and unrecognised, can be carried forward indefinitely.

Movement in the recognised deferred tax liability is analysed below:


Intangible assets
£'000
As at 28 November 2010
Recognised through the income statement (395)
As at 27 November 2011 (395)

As at 27 November 2011 the Group recognised a deferred tax liability of £0.4 million in respect of intangible assets that management deemed to qualify for research and development corporation tax relief. After corporation tax relief, the timing of tax deductions in respect of expenditure incurred on these assets differs to the amortisation profile of the assets giving rise to the deferred tax liability. This liability will be unwound over the useful lives of the assets.