5. Taxation

2007/08
$m		 2006/07
$m		 2005/06
$m
Income before tax:
– UK 132.5 113.7 90.4
– US 203.7 273.6 263.9
336.2 387.3 354.3
Current taxation:
– UK 42.0 30.7 20.7
– US 67.5 105.8 108.0
Deferred taxation:
– UK (2.6) (3.7) (1.3)
– US 9.5 1.8 (11.1)
116.4 134.6 116.3
2007/08
$m		 2006/07
$m		 2005/06
$m
Sources of deferred taxation are as follows:
UK property, plant and equipment (2.5) (0.8) 2.3
US property, plant and equipment (2.6) (3.0) (1.8)
Inventory valuation 21.3 16.5 8.7
Allowances for doubtful debts (3.2) (2.3) (2.0)
Revenue deferral (extended service agreements) (5.5) (4.1) (3.8)
Straight line lease payments (2.2) (2.4) (2.0)
Deferred compensation (1.7) (1.5) (1.6)
Retirement benefit obligations (1.2) (2.8) (1.0)
Other temporary differences 4.5 (1.5) (11.2)
6.9 (1.9) (12.4)

The differences between the standard rate of corporation tax in the UK and the effective tax rates for the Group are explained below:

2007/08
%		 2006/07
%		 2005/06
%
UK statutory tax rates 30.0 30.0 30.0
Differences between UK and US (including state) standard
tax rates 5.0 5.7 5.6
Expenditure permanently disallowable for tax purposes, net of
permanent undercharges 0.6 1.3 (0.5)
Over provision in respect of previous periods (1.0) (2.2) (2.3)
34.6 34.8 32.8

The Group's effective tax rate is higher than the UK statutory tax rate because the significant proportion of the Group's business is conducted in the US where the combined federal and state tax rate approaches 40 per cent. The Group's future effective tax rate is dependent on changes in the geographic mix of incomes and the movement in foreign exchange translation rates. It is likely that there will be greater volatility in the Group's effective tax rate going forward owing to changes in the tax environment in both the UK and the US.

Deferred tax assets/(liabilities) consisted of the following:

2 February 2008 3 February 2007 28 January 2006
Assets
$m		 (Liabilities)
$m		 Total
$m		 Assets
$m		 (Liabilities)
$m		 Total
$m		 Assets
$m		 (Liabilities)
$m		 Total
$m
UK property, plant and equipment 2.3 - 2.3 - (0.2) (0.2) - (0.9) (0.9)
US property, plant and equipment - (15.8) (15.8) - (18.3) (18.3) - (21.4) (21.4)
Inventory valuation - (77.4) (77.4) - (56.1) (56.1) - (39.5) (39.5)
Allowances for doubtful debts 22.1 - 22.1 18.9 - 18.9 16.6 - 16.6
Revenue deferral (extended service
agreements) 46.2 - 46.2 40.6 - 40.6 36.5 - 36.5
Straight line lease payments 17.3 - 17.3 15.2 - 15.2 12.7 - 12.7
Deferred compensation 13.3 - 13.3 11.6 - 11.6 - - -
Retirement benefit obligations 1.6 - 1.6 - (1.2) (1.2) 0.3 - 0.3
Other temporary differences 17.1 - 17.1 21.9 - 21.9 22.6 - 22.6
UK property related, net 0.3 - 0.3 0.2 - 0.2 0.2 - 0.2
Value of UK capital losses 27.7 - 27.7 29.4 - 29.4 26.9 - 26.9
Total deferred tax asset/(liability) 147.9 (93.2) 54.7 137.8 (75.8) 62.0 115.8 (61.8) 54.0
Valuation allowance (28.0) - (28.0) (29.6) - (29.6) (27.1) - (27.1)
Deferred tax asset/(liability) 119.9 (93.2) 26.7 108.2 (75.8) 32.4 88.7 (61.8) 26.9
Current assets - 1.6 -
Current liabilities (47.9) (27.8) (16.1)
Non-current assets 74.6 58.6 43.0
Deferred tax asset/(liability) 26.7 32.4 26.9

The difference on translation in respect of deferred tax posted directly to equity in the period ended 2 February 2008 was $0.1 million charge (2006/07: $3.0 million charge). The Company believes that it is more likely than not that the net deferred tax asset of $26.7 million at 2 February 2008 will be realized on future tax returns, primarily from the generation of future taxable income.

On 4 February 2007 the Group adopted FIN 48 "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109". The provisions of FIN 48 were applied to all tax positions on adoption of this interpretation. There was no cumulative effect adjustment to the opening balance of retained earnings arising as a result of the adoption of FIN 48 and no adjustments were made to other components of shareholders' equity in the balance sheet.

The Group has business activity in all states within the US and files income tax returns for the US federal jurisdiction and all applicable states. The Group also files income tax returns in the UK and certain other foreign jurisdictions. The Group is subject to US federal and state examinations by tax authorities for tax years after 2 November 2002 and is subject to examination by the UK tax authority for tax years after 31 January 2003.

At the beginning of 2007/08, the Group had approximately $20.9 million of total unrecognized tax benefits, all of which would favorably affect the effective income tax rate in future periods if resolved in the Group's favor. Included within this, as of the adoption date, the Group had accrued interest and penalties expense related to the unrecognized tax benefits of $2.7 million.

The following table summarizes the activity related to unrecognized tax benefits:

Total
$m
At 3 February 2007
Increases related to current year tax positions 3.4
Prior year tax positions  
  Increases 3.7
  Decreases (3.1)
Cash settlements (1.9)
At 2 February 2008 23.0

The total amount of unrecognized tax benefits in respect of uncertain tax positions as of 2 February 2008 was $23.0 million, all of which would favorably affect the effective tax rate if resolved in the Group's favor. These unrecognized tax benefits relate to financing arrangements and intra-group charges which are subject to different and changing interpretations of tax law.

The Group recognizes accrued interest and penalties related to unrecognized tax benefits within income tax expense. During 2007/08, the total amount of interest recognized in income tax expense in the consolidated income statement was $1.1 million. As of 2 February 2008 the Group had accrued interest and penalties of $3.8m.

Over the next twelve months management believes that it is reasonably possible that there could be a reduction of substantially all of the unrecognized tax benefits as of 2 February 2008, due to settlement of the uncertain tax positions with the tax authorities.