for the year ended 31 December 2006

1 Accounting policies

(a) Basis of preparation

The accounts are prepared under the historical cost convention and in accordance with applicable accounting standards. The accounts comply with the following new Financial Reporting Standards and Urgent Issues Task Force abstracts issued by the UK Accounting Standards Board.

Amendment to FRS23 (IAS21): The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation
This amendment, which is mandatory for accounting periods beginning on or after 1 January 2006, amended FRS 23 to correspond to the IASB amendments to IAS 21 issued in December 2005. Adoption of this amendment did not have any effect on the financial statements of the company.

A separate profit and loss account dealing with the results of the parent undertaking only has not been presented as provided by section 230 of the Companies Act 1985.

(b) Tangible fixed assets

Depreciation is provided on all tangible fixed assets, other than freehold land, at rates calculated to write off the cost on a straight-line basis over the expected useful lives of the assets concerned, as follows:

(c) Investments

Fixed asset investments are shown at cost, less provisions for impairment.

Investments held as current assets are stated at the lower of cost and net realisable value.

The carrying value of fixed asset investments are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable.

(d) Pension schemes

The company maintains a number of contracted-out defined contribution schemes and contributions are charged to the profit and loss account in the year in which they are due. These schemes are funded and the payment of contributions is made to separately administered trust funds. The assets of these schemes are held separately from the company. The company remits monthly pension contributions to Capita Business Services Limited, a subsidiary undertaking of the company, which pays the Group liability centrally. Any unpaid contributions at the year end have been accrued in the accounts of that company.

(e) Leasing commitments

Assets obtained under finance leases are capitalised in the balance sheet and depreciated over the shorter of the lease term and their useful economic lives.

The finance charges under finance leases and hire purchase contracts are allocated to accounting periods over the period of the lease and represent a constant proportion of the balance of capital repayments outstanding. Rentals due under operating leases are charged on a straight-line basis over the lease term.

(f) Deferred taxation

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, taxation, with the following exceptions:

• provision is made for taxation on gains arising from the revaluation (and similar fair value adjustments) of fixed assets, and gains on disposal of fixed assets that have been rolled over into replacement assets, only to the extent that, at the balance sheet date, there is a binding agreement to dispose of the assets concerned. However, no provision is made where, on the basis of all available evidence at the balance sheet date, it is more likely than not that the taxable gain will be rolled over into replacement assets and charged to taxation only where the replacement assets are sold
• provision is made for deferred taxation that would arise on remittance of the retained earnings of overseas subsidiaries only to the extent that, at the balance sheet date, dividends have been accrued as receivable
• deferred taxation assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Deferred taxation is measured on an undiscounted basis at the taxation rates that are expected to apply in the periods in which timing differences reverse, based on taxation rates and laws enacted or substantively enacted at the balance sheet date.

(g) Foreign currencies

Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction or at the contracted rate if the transaction is covered by a forward exchange contract. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date or if appropriate at the forward contract rate. All differences are taken to the profit and loss account with the exception of differences on foreign currency borrowings, to the extent that they are used to finance or provide a hedge against foreign equity investments, which are taken directly to reserves together with the exchange difference on the carrying amount of the related investments.

(h) National Insurance on share option gains

National Insurance on outstanding share options at the year end has been grossed up and shown as a provision and a receivable on the balance sheet.

(i) Financial instruments: disclosure and presentation

A separate note dealing with the disclosures of FRS 25 has not been presented as provided by paragraph 3C of FRS 25. The consolidated financial statements include the required disclosures of IAS 32 for the Group.

(j) Derivative financial instruments

The company uses derivative financial instruments such as interest rate swaps and foreign currency contracts to hedge risks associated with interest and exchange rate fluctuations. Such derivative financial instruments are stated at fair value. The fair values of interest rate swaps and foreign currency contracts are determined by reference to market rates for similar instruments.

For the purpose of hedge accounting, hedges are classified as either: fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability; or cash flow hedges where they hedge exposure to variability in cash flows that is attributable to either a particular risk associated with a recognised asset or liability or a forecast transaction.

In relation to fair value hedges (e.g. fixed to floating interest rate swaps held as fair value hedges against fixed interest rate borrowings) which meet the conditions for hedge accounting, any gain or loss from re-measuring the hedging instrument at fair value is recognised immediately in the profit and loss account. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognised in the profit and loss account. The company does not currently hold any significant cash flow hedges.

For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the profit and loss account.

(k) Share based payments

The company operates a number of executive and employee share schemes.

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. Fair value is determined using an option pricing model. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the company (market conditions).

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon amarket condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions, the number of equity instruments that will ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in cumulative expense since the previous balance sheet date is recognised in the profit and loss account, with a corresponding entry in equity.

2 Deferred taxation

3 Profit attributable to members of the parent undertaking

The profit after taxation dealt with in the accounts of the parent undertaking was £189.5m (2005: £155.8m).

4 Dividends

5 Tangible fixed assets

6 Investments

(a) Fixed asset investments

During the year the company completed intragroup transfers as follows: It acquired Capita Life & Pensions Regulated Services Limited, and disposed of Capita Trust Company (Jersey) Limited, Cost Auditing Holdings Limited, Capita Absence Management Limited and Capita Health Solutions. These transfers took place at net book value and were settled by cash. The company also subscribed for 20 million £1 ordinary shares in Capita Retail Financial Services Limited, a subsidiary undertaking.

Activities of The Capita Group Plc undertakings

(b) Trade investments

7 Debtors

8 Creditors

The bank overdraft and the bonds are unsecured.

9 Provisions for liabilities and charges

10 Share capital

During the year the company repurchased 52.9m ordinary 2p shares with an aggregate nominal value of £1.1m at a total cost of £244.9m for which it paid cash at a weighted average cost per share of £4.64. These shares were cancelled.

During the year 16.4m ordinary 2p shares with an aggregate nominal value of £0.4m were issued under share option schemes for a total consideration of £50.4m.

Treasury shares

During the year the company cancelled its holding of treasury shares.

The company has an unexpired authority to repurchase up to 10% of its issued share capital.

11 Reserves

12 Reconciliation of movements in shareholders' funds

13 Commitments and contingent liabilities

(a) Annual commitments under operating leases were as follows:

(b) The company has guaranteed overdraft and loan facilities of Group undertakings amounting to £205.0m (2005: £212.3m). The following companies have provided in the normal course of their businesses, performance bonds: Capita Business Services Limited £2.6m (2005: £3.3m), Equita Limited £0.9m (2005: £0.5m), Capita IRG Trustees Limited £nil (2005: £0.3m), Capita Insurance Company Limited £2.0m (2005: £nil), Capita Business Travel Limited (formerly Lonsdale Travel Limited) £1.2m (2005: £nil) and Capita Group Insurance Company Limited £1.0m (2005: £nil). The following companies have provided indemnities in the normal course of business: Capita Symonds Limited £nil (2005: £10.0m), Capita Business Services Limited £0.5m (2005: £0.5m).

14 Borrowings and finance leases

Loan notes were issued in previous years pursuant to the satisfaction of consideration due in relation to the acquisition of a subsidiary undertaking.

The company has issued guaranteed unsecured bonds as follows:

All series are unsecured.
* The company has entered into an interest rate swap to convert the interest cost based on 6 month LIBOR.
** The company has entered into currency swaps for the US$ issues to achieve a floating rate of interest based on 6 month LIBOR. Further disclosure on the company's use of hedges is included in note 24.

15 Acquisitions

The company made no external acquisitions during the year.

16 Related party transactions

There were no related party transactions that require disclosure in the year.

17 Pension costs

The company operates a defined contribution scheme.

The pension charge for the defined contribution scheme for the year was £0.7m (2005: £0.6m).

18 Share based payment

The total company expense, after recharging subsidiary undertakings, charged to the profit and loss account in respect of FRS 20 'Share based payment’ was £2.6m (2005: £1.8m).