BT 2011 Annual Report Download - page 55

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FINANCIAL REVIEW LIQUIDITY/FUNDING AND CAPITAL MANAGEMENT
We have a policy to lobby the UK Government directly on tax
matters that are likely to impact our customers or shareholders and
to respond to consultation documents where the impact could be
substantial. We also lobby the UK Government indirectly though
the CBI, various working groups and committees and leading
professional advisors.
Tax accounting and cash flow
At each financial year end an estimate of the tax charge is
calculated for the group and the level of provisioning across the
group is reviewed in detail. As it can take a number of years to
obtain closure in respect of some items contained within the
corporation tax returns it is necessary for us to reflect the risk that
final tax settlements will be at amounts in excess of our submitted
corporation tax computations. The level of provisioning involves
management judgement and estimation.
The UK Government reduced the rate of corporation tax by 2% to
26%, effective from 1 April 2011. This has resulted in a deferred tax
credit of £172m in the income statement which has been classified
as a specific item. The UK Government has also indicated that it
intends to enact future reductions in the corporation tax rate at 1%
per annum down to 23% by 1 April 2014.
The tax expense and the cash tax paid in each financial year are
different, principally because UK cash tax payments are paid in
quarterly instalments which straddle two consecutive financial
years. For example, the cash tax paid in 2011 comprised the first
two quarterly instalments in respect of 2011 and the last two
instalments in respect of 2010. In addition there are differences in
the basis of some items, such as pension deficit payments, which are
deductible for the purpose of cash tax payments but are not a
charge to the income statement and therefore do not impact the tax
expense.
The total tax expense for 2011 was £213m and cash tax payments
were £209m. Whilst the net difference is insignificant, there are
some significant differences. These include the £172m deferred tax
credit recognised in the income statement as described above and
the current tax deduction available on our pension deficit payments
of £1,030m.
The total tax credit for 2010 was £22m and a net tax refund of
£349m was received which comprised payments of £76m offset by
tax repayments of £425m relating to prior years. The total tax credit
in 2009 was £53m and cash tax payments were £229m, of which
£210m was repaid in 2010.
Tax losses
The group has unrecognised tax losses of £23.5bn, of which
£17.8bn are capital losses arising in the UK, as set out in note 24 to
the consolidated financial statements.
FUNDING AND CAPITAL
MANAGEMENT
Capital management and funding policy
The objective of the group’s capital management policy is to reduce
net debt over time whilst investing in the business, supporting the
pension scheme and paying progressive dividends. In order to meet
this objective the group may issue or repay debt, issue new shares,
repurchase shares or adjust the amount of dividends paid to
shareholders. The group manages the capital structure and makes
adjustments to it in the light of changes in economic conditions and
the risk characteristics of the group. The Board regularly reviews the
capital structure. No changes were made to the group’s objectives
and processes during 2011 and 2010.
The general funding policy is to raise and invest funds centrally to
meet anticipated requirements using a combination of capital
market bond issuance, commercial paper borrowing, committed
borrowing facilities and investments. These financial instruments
vary in their maturity in order to meet short, medium and long-
term requirements.
At 31 March 2011 the group had financial assets of £3.7bn (2010:
£6.5bn) consisting of current and non-current investments,
derivative financial assets, trade and other receivables, cash and
cash equivalents. The reduction in 2011 principally reflects the use
of cash and investments to fund £2.5bn of debt maturities.
Credit exposures are continually reviewed and proactive steps are
taken to ensure that the impact of adverse market conditions on
these financial assets is minimised. In particular, line of business
management actively review exposures arising from trading
balances and, in managing investments and derivative financial
instruments, the treasury operation monitors the credit quality
across treasury counterparties and is actively managing exposures
which arise.
Additional disclosures relating to financial assets and financial
liabilities are included in notes 15, 16, 19, 20, 21, 22, 25 and 29 to
the consolidated financial statements and include a debt maturity
profile, currency and interest rate composition and hedging
strategy. Details of the group’s treasury management policies are
included in note 29 to the consolidated financial statements.
Net debt
At 31 March 2011 net debt was £8,816m compared with £9,283m
at 31 March 2010, a reduction of £467m. Apart from funding the
dividend payments of £543m and pension deficit payments of
£1,030m the free cash flow generated from business activities has
been used to reduce net debt.
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