Advantage General Insurance Company Ltd v The Commissioner of Taxpayer (Appeals (Jamaica)
| Jurisdiction | UK Non-devolved |
| Judge | Lord Mance,Lord Sumption,Lord Clarke,Lord Hodge,Lord Carnwath |
| Judgment Date | 07 March 2016 |
| Neutral Citation | [2016] UKPC 8 |
| Date | 07 March 2016 |
| Docket Number | Appeal No 0093 of 2014 |
| Court | Privy Council |
[2016] UKPC 8
Privy Council
From the Court of Appeal of Jamaica
Lord Mance
Lord Clarke
Lord Sumption
Lord Carnwath
Lord Hodge
Appeal No 0093 of 2014
Appellant
Michael Hylton QC
Kevin Powell
(Instructed by Myers Fletcher & Gordon)
Respondent
Nicole Foster-Pusey QC
(Solicitor General of Jamaica)
Althea Jarrett (Director of State Proceedings)
(Instructed by Charles Russell Speechlys)
(with whom Lord Mance, Lord Clarke and Lord Hodge agree)
The appellant company's business is in general insurance. The appeal concerns the tax consequences of a change in practice for valuation of its reserves, arising from the Insurance Act 2001. Although the Act came into operation on 21 December 2001 and was not retrospective, the company adopted the new approach to restate its financial statements for the calendar year ending December 2000, and submitted an amended tax return on that basis. The effect of the amendments if accepted was to create a substantial loss in that year, which the company sought to carry forward to set against profits in subsequent years up to and including 2003. The appeal concerns an assessment issued by the Commissioner of Taxpayer Audit and Assessment Department ("CTAAD") for that year.
The story begins on 1 June 2001, the date of the company's audited financial statements for the calendar year 2000. The notes to the financial statements (under the general heading "significant accounting policies") included a section on "underwriting results". These had been determined after making provision for "inter alia, claims equalisation, unexpired risks, unearned premiums and outstanding claims". "Claims equalisation" was explained as an amount set aside to "reduce exceptional fluctuations in the amount charged to revenue in subsequent years" calculated as 5% of the year's net premium. The last item (which included "claims incurred but not reported" -"IBNR") was explained as follows:
"Outstanding claims represent 24% (1999–25%) of net premium income for motor vehicle business and the estimated amount of claims reported for the other classes of business."
This item amounted to $372.9m, out of a total for "insurance funds" of $1,242.3m (Note 13). (The figures here and below have been rounded to one decimal point.)
The statement showed profit before tax as $84.8m. A tax return based on this statement was submitted on 20 June 2001. It showed "statutory income" as $97.3m and tax payable as $14.5m. The return would in principle have triggered liability to pay under a "deemed assessment" (ITA section 67(5) see below), so far as not already paid during the year as estimated tax (section 65); but there appears to be no indication in the papers before the Board whether or when any payment of tax was made pursuant to this return.
In 2001, in accordance with the new Insurance Act, the company appointed actuaries to value its actuarial reserves and other policy liabilities, including its reserves as at 31 December 2001. The financial statement for 2001 was dated October 2002. In accordance with standard accounting practice, comparative figures were given for 2001 and the previous year. In the equivalent section under "significant accounting policies" it was stated that the "underwriting results" had been determined after making provisions for "inter alia, unearned premiums, unexpired risks and outstanding claims as computed by the actuaries". There was no specific provision for "claims equalisation", as in the previous financial statement. The final item was explained:
"Outstanding claims represent a percentage of net premium for motor vehicle business and the estimated amount of claims reported for the other classes of business as determined by the actuaries."
Under the heading "change of accounting policy" it was stated:
"The Insurance Act 2001 requires that the claims and policy liabilities be the same as those calculated by the actuaries within a small tolerance. Accordingly, the estimated provisions previously calculated by management have been superseded by the calculations of the actuaries (see Note 14)."
Note 14 referred to the "actuarial review" performed by consultant actuaries on "the loss and loss adjustments on expense reserves for 2001". The actuaries' estimates had been guided by "inter alia, historic loss statistics, statistical fluctuations, and considerations of the economic environment". The note added:
"Based upon their review and calculation they are of the opinion that the provisions in respect of prior years were unreasonable and accordingly the provisions existing at 31 December 2000 were adjusted to give retrospective effect to their findings (Note 18)."
Note 18 described the "prior year adjustment" as that required "to reflect the required amounts at 31 December 2000 as calculated by the actuaries". The resulting figures, again under the heading "insurance funds", were given for 2001 and 2000. The amended 2000 figure for "outstanding claims" was $1,306m, out of a total of $2,031.9m, resulting in a loss for that year of $704.4m. A tax return for 2001 based on these figures was submitted on 22 November 2002. It showed "losses for previous years (brought forward)" of $692.2m, contributing to a "statutory" loss of $733.1m.
The financial statement for 2002 (dated 6 June 2003) was prepared again in accordance with the requirements of the 2001 Act. Under "significant accounting policies" there was a somewhat fuller explanation than in the previous statement of the provision for outstanding claims. They had, it was said, been "actuarially determined" with reference to estimates of claims notified before the closure of the records, and of the probable cost of claims incurred but not reported. (In an unexplained departure from the previous statement, there was no indication that motor vehicle claims had been dealt with on a separate, percentage basis.)
In September 2004 the company submitted a tax return for 2002, showing "brought forward" losses of $733.1m, and a statutory loss of $728.4m. At the same time it submitted an amended return for 2000 showing a statutory loss of $692.2m (equivalent to the loss which had been "brought forward" in the 2001 return). Although they are not before the Board, it appears that returns were in due course made for 2003 and 2004.
The Board have not been shown any contemporary letter or document explaining the change to the 2000 return. According to an affidavit sworn in these proceedings by its Vice President of Finance, the company "had to restate" its 2000 financial statements because this was required by "the applicable accounting standards, particularly International Accounting Standard 8". (In the documents before the Board the change appears only in the comparative previous year figures, as shown in the 2001 statement. The papers do not include an amended financial statement for the year 2000 as such.)
There appears to have been no response from the tax authorities to any of these submissions, by way of assessment or otherwise, until 30 November 2007. On that date the CTAAD sent an "adjustment" of the tax returns to the years 2001–2004. The returns for each of the four years had been adjusted to give effect to the decision to "disallow" the loss of $692.2m brought forward from 2000, "as the amendments … creating this loss would not have resulted from the legislative changes in the Insurance Act of 2001".
Before returning to the formal decision under appeal, and the subsequent proceedings, it is convenient to refer to the relevant statutory provisions.
Although there was much discussion of the Insurance Act of 2001 in the courts below, it has played little part in the submissions to the Board. Its relevance is chiefly as providing the trigger for the company's restatement of its 2000 accounts. It can be dealt with very shortly. The Act replaced the Insurance Act 1972. As appears from its "Memorandum of Objects and Reasons", it followed a detailed examination of "the problems experienced in the insurance industry" and was designed to effect overall improvements, including regulations relating to solvency standards and the appointment and duties of actuaries. Section 44 required every registered insurer to appoint an actuary, whose duties would include the valuation of "the actuarial reserves" as at the end of each financial year "in accordance with generally accepted actuarial practice". The Act took effect in December 2001. There is nothing in it to indicate that it was intended to have retrospective effect for years before 2001.
The governing taxing statute is the Income Tax Act. Section 5 imposes a charge to tax on annual profits and gains arising (inter alia) from a trade or business carried on in the Island. The rates are set out in section 30. Section 13 provides that, for the purpose of ascertaining the chargeable or statutory income of any person, there are to be deducted "all disbursements and expenses wholly and exclusively incurred by such person in acquiring the income". Permitted deductions include "the amount of any loss" sustained in the business "which, if it had been profit, would have been assessable … during the year of assessment and previous years of assessment", subject to disallowing any loss allowed against the income of a previous year (section 13(1)(h) emphasis added). Thus, carried forward losses are not limited to losses from the immediately preceding year.
Section 48 makes special provision for (inter alia) insurance companies. The gains and profits on which tax is payable are to be ascertained in accordance with a table set out in the section. This provides for the deduction of the "permitted...
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