Barclays 2008 Annual Report Download - page 27

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Business review
Barclays PLC Annual Report 2008 25
Gains on acquisitions
2008/07
The gains on acquisitions in 2008 relate to the acquisition of Lehman
Brothers North American businesses (£2,262m) on 22nd September
2008, Goldfish credit card UK business (£92m) on 31st March 2008 and
Macquarie Bank Limited Italian residential mortgage business (£52m)
on 6th November 2008.
Tax
The overall tax charge is explained in the table below.
2008/07
The effective rate of tax for 2008, based on profit before tax, was 13%
(2007: 28%). The effective tax rate differs from the 2007 effective rate
and the UK corporation tax rate of 28.5% principally due to the Lehman
Brothers North American businesses acquisition. Under IFRS the gain on
acquisition of £2,262m is calculated net of deferred tax liabilities included
in the acquisition balance sheet and is thus not subject to further tax in
calculating the tax charge for the year. Furthermore, Barclays has tax
losses previously unrecognised as a deferred tax asset but capable of
sheltering part of this deferred tax liability. This gives rise to a tax benefit of
£492m which, in accordance with IAS 12, is included as a credit within the
tax charge for the year. The effective rate has been adversely impacted by
the effect of the fall in the Barclays share price on the deferred tax asset
recognised on share awards. In common with prior years there have been
offsetting adjustments relating to different overseas tax rates, disallowable
expenditure and non-taxable gains and income.
2007/06
The tax charge for the period was based on a UK corporation tax rate
of 30% (2006: 30%). The effective rate of tax for 2007, based on profit
before tax, was 28% (2006: 27%). The effective tax rate differed from
30% as it took account of the different tax rates applied to profits earned
outside the UK, non-taxable gains and income and adjustments to prior
year tax provisions. The forthcoming change in the UK rate of corporation
tax from 30% to 28% on 1st April 2008 led to an additional tax charge
in 2007 as a result of its effect on the Group’s net deferred tax asset.
The effective tax rate for 2007 was higher than the 2006 rate, principally
because there was a higher level of profit on disposals of subsidiaries,
associates and joint ventures offset by losses or exemptions in 2006.
Economic profit
Economic profit comprises:
– Profit after tax and minority interests; less
– Capital charge (average shareholders’ equity and goodwill excluding
minority interests multiplied by the Group cost of capital).
The Group cost of capital has been applied at a uniform rate of 10.5%a.
The costs of servicing preference shares are included in minority interests,
so preference shares are excluded from average shareholders’ equity for
economic profit purposes.
Gains on acquisitions
2008 2007 2006
£m £m £m
ˆ
Gains on acquisitions 2,406 ––
Tax
2008 2007 2006
£m £m £m
Profit before tax 6,077 7,076 7,136
Tax charge at average UK
corporation tax rate of 28.5%
(2007: 30%, 2006: 30%) 1,732 2,123 2,141
Prior year adjustments (176) (37) 24
Differing overseas tax rates 215 (77) (17)
Non-taxable gains and income
(including amounts offset by
unrecognised tax losses) (833) (136) (393)
Share-based payments 229 72 27
Deferred tax assets not
previously recognised (514) (158) (4)
Change in tax rates (1) 24 4
Other non-allowable expenses 138 170 159
Overall tax charge 790 1,981 1,941
Effective tax rate 13% 28% 27%
Reconciliation of economic profit
2008 2007 2006
£m £m £m
Profit attributable to equity
holders of the parent 4,382 4,417 4,571
Addback of amortisation charged
on acquired intangible assetsb254 137 83
Profit for economic profit purposes 4,636 4,554 4,654
Average shareholders’ equity
for economic profit purposesc, d
(rounded to nearest £50m) 27,400 23,700 20,500
Post-tax cost of equity 10.5% 9.5% 9.5%
Capital charge a(2,876) (2,264) (1,950)
Economic profit 1,760 2,290 2,704
Notes
aThe Group’s cost of capital changed from 1st January 2008 to 10.5% (2007: 9.5%).
bAmortisation charged for purchased intangibles, adjusted for tax and minority interests.
cAverage ordinary shareholders’ equity for Group economic profit calculation is the sum
of adjusted equity and reserves plus goodwill and intangible assets arising on acquisition,
but excludes preference shares.
dAverages for the period will not correspond exactly to period end balances disclosed in the
balance sheet. Numbers are rounded to the nearest £50m for presentation purposes only.