Commercial Union Assurance Company Plc v Shaw
| Jurisdiction | England & Wales |
| Judge | LORD WOOLF, MR,LORD JUSTICE PETER GIBSON,LORD JUSTICE BROOKE |
| Judgment Date | 21 December 1998 |
| Judgment citation (vLex) | [1998] EWCA Civ J1221-23 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | CHRVF 98/0348 |
| Date | 21 December 1998 |
[1998] EWCA Civ J1221-23
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(MR JUSTICE HARMAN)
Royal Courts of Justice
Strand
London WC2
The Master of the Rolls (Lord Woolf)
Lord Justice Peter Gibson
Lord Justice Brooke
CHRVF 98/0348
MR G AARANSON QC and MR M GAMMIE (Instructed by Messrs Linklaters Paines, London, EC2Y 8HQ) appeared on behalf of the Appellant
MR I GLICK QC and MR J PEACOCK (Instructed by the Solicitor for the Inland Revenue, London, WC2R 1LB) appeared on behalf of the Respondent
Monday 21 December 1998
For the reasons given in the judgment handed down, this appeal will be dismissed.
The Appellant taxpayer company, Commercial Union Assurance Co. plc ("CU"), in each accounting period relevant to this appeal made payments of interest constituting charges on income and received foreign income subject to foreign tax qualifying for double taxation relief ("DTR"). It purported to allocate to its foreign income only so much of the charges on income as would leave the corporation tax otherwise payable on that foreign income equal to and offset by DTR, thereby leaving to its modest chargeable gains constituting the remainder of its total profits the remainder of the charges on income. The primary issue in this appeal is whether it was entitled to compute its profits in that way, which produces an excess of charges on income capable of being carried forward to a subsequent accounting period (on the assumption that the payments of interest were made wholly for the purposes of a trade carried on by CU). A second issue which arises if CU was so entitled is whether those interest payments were made wholly and exclusively for the purposes of a trade carried on by CU. If they were not, then they would not be capable of being carried forward. The first issue turns on the true construction and interpretation of several provisions of the Income and Corporation Taxes Act 1988 ("the 1988 Act"), viz. s.338( 1), s.393(9) and s.797(3). The second issue is basically one of fact.
CU appealed to the General Commissioners for the City of London against corporation tax assessments for the 8 accounting periods ended 31 December in the years 1984 to 1991 and against the Revenue's refusal to allow CU's claim to carry forward losses (in the form of excess charges on income) in respect of the last 3 of the 8 periods. The appeal was heard by distinguished Commissioners (Mr. D.C. Potter Q.C., Mr. J.W. Lindsey and Mr. R.M. Rouse) who gave a decision in principle on the two issues to which I have referred. On each they reached a conclusion against CU, which appealed to the High Court by way of Case Stated. Harman J. on 20 February 98 dismissed the appeal. CU now appeals to this court on both issues. The Revenue by a Respondent's Notice contends that the judge's decision should be affirmed on grounds additional to those relied on by the judge.
The judge's decision is now reported together with the Case Stated setting out the General Commissioners' findings of fact and reasons ( [1998] S.T.C. 386). In consequence I need only give a brief summary of the facts to make this judgment comprehensible.
The facts
CU in the material periods carried on the trade of writing insurance. It had numerous U.K. subsidiaries which carried on the like trade. CU's business also included holding shares in numerous non-U.K. companies each of which carried on a trade of writing insurance. CU also traded through branches outside the U.K. CU had profits including dividends in respect of which tax was payable under the laws of territories outside the U.K. Financing its own trade and the trades carried on by its subsidiaries was an integral part of CU's commercial operations. Between 1972 and 1987 CU raised 6 loans which formed a pool of money used to meet the needs of CU's entire business, including the trading needs of CU itself and of its subsidiaries. The substantial payments of interest by CU on those loans were charges on income in the relevant periods.
In each relevant period CU purported to allocate just enough of the charges on income to its foreign income as would leave sufficient of that income to enable it to take the full benefit of DTR. It says that in consequence the charges on income exceed the remaining profits of that period and the excess charges on income are accordingly to be carried forward as losses. Thus in the accounting period ended 31 December 1989, CU had income of £54 million chargeable under Case V of Schedule D and chargeable gains of £400,000. Its total profits were therefore £54.4 million. It had £23.1 million charges on income and was entitled to a DTR credit of £16.7 million. It had a Case I loss of £64 million. It purported to allocate £6.3 million of the charges on income to the Case V income of £54 million (leaving £47.7 million liable to corporation tax at 35%). That gave rise to a corporation tax liability of £16.7 million against which it set off the £16.7 million DTR. That left the remaining £16.8 million out of the £23.1 million charges on income to be set against the £400,000 chargeable gains so as to produce an excess of charges on income of £16.4 million. CU claims that the excess charges on income can be carried forward even though the charges on income (£23.1 million) do not exceed the total profits for the period (£54.4 million). It was common ground that if on the proper construction of the statutory provisions effect had to be given to charges on income in an accounting period before DTR could be applied, not all the DTR could be utilised and the excess DTR of £5.7 million would expire unused.
CU has provided no breakdown of the credit of £16.7 million. We are not told what amounts of its foreign income suffered foreign tax at what rates of tax. But the parties have been content to proceed on the basis that overall the foreign tax has been borne at a rate less than the applicable corporation tax rate of 35%.
The statutory provisions
Corporation tax is chargeable on the profits of companies resident in the UK (ss.6(1) and 11(1)). Assessments to corporation tax are made on a company by reference to its accounting periods (s.8(3)). The amount of any income must be computed in accordance with income tax principles under the like Schedules and Cases as apply for the purposes of income tax and the amounts so computed for the several sources of income together with any amount in respect of chargeable gains must be aggregated to arrive at the total profits (s.9(3)). A company may have outgoings which for tax purposes are not treated as reducing its profits from a particular source but which are to be deducted from its total profits. Charges on income are such outgoings, and interest payments, when not deductible expenditure in computing the profits of a trade, may be charges on income under s.338 (2) and (3). By s.338 (1):
"Subject to sections 339, 494 and 787, in computing the corporation tax chargeable for any accounting period of a company any charges on income paid by the company in the accounting period, so far as paid out of the company's profits brought into charge to corporation tax, shall be allowed as deductions against the total profits for the period as reduced by any other relief from tax, other than group relief."
Charges on income paid by a company in an accounting period can be carried forward as a loss, capable of being set off against trading income in subsequent accounting periods, if they satisfy the conditions of s.393(9):
"Where in an accounting period the charges on income paid by a company -
(a) exceed the amount of the profits against which they are deductible, and
(b) include payments made wholly and exclusively for the purposes of a trade carried on by the company,
then up to the amount of that excess or of those payments, whichever is the less, the charges on income so paid shall in computing a loss for the purposes of subsection (1) above be deductible as if they were trading expenses of the trade."
Part XVIII of the 1988 Act enabled the Crown to enter into reciprocal arrangements with the government of another territory outside the U.K., which provide that the tax payable on foreign income under the laws of that territory will be allowed as a credit (in the form of DTR) against tax payable in the U.K. in respect of that income (s.788( 4)). S.797 provides (so far as material) as follows:
"(1) The amount of the credit for foreign tax which under any arrangements is to be allowed against corporation tax in respect of any income or chargeable gain ("the relevant income or gain") shall not exceed the corporation tax attributable to the relevant income or gain, determined in accordance with subsections (2) and (3) below.
(2) Subject to subsection (3) below, the amount of corporation tax attributable to the relevant income or gain shall be treated as equal to such proportion of the amount of that income or gain as corresponds to the rate of corporation tax payable by the company (before any credit under this Part) on its income or chargeable gains for the accounting period in which the income arises or the gain accrues ("the relevant accounting period").
(3) Where in the relevant accounting period there is any deduction to be made for charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of more than one description -
(a) the company may for the purposes of this section allocate the deduction in such amounts and to such of its profits...
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