Legal and General Assurance Society Ltd v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 14 July 2006 |
| Neutral Citation | [2006] EWHC 1770 (Ch) |
| Docket Number | Case No: CH/2005/APP/0636 |
| Court | Chancery Division |
| Date | 14 July 2006 |
[2006] EWHC 1770 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr. Justice Evans-Lombe
Case No: CH/2005/APP/0636
CH/2005/APP/0637
Malcolm Gammie QC, Daniel Jowell (instructed by G J Timms of LGAS) for the Appellant
Launcelot Henderson QC, David Ewart (instructed by Acting Solicitor to Her Majesty's Revenue & Customs) for the Respondent
Hearing dates: 13 th– 16 th June 2006
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Evans-Lombe
Mr Justice Evans-Lombe:
This is an appeal from two decisions of the Special Commissioners ("the Commissioners") in tax matters, the first, the "Interim Decision", dated the 28 th January 2005, the second dated the 19 th July 2005. The proceedings before the Commissioners raised three issues all of their decisions upon which are appealed to this court. The first and main issue is whether Legal & General Assurance Society Ltd ("LGAS") was entitled in the relevant years to credit against the amount of corporation tax payable in respect of any year of assessment on its profits from its pension business generally, tax deducted at source by the authorities in foreign countries, on the relevant parts of its income from investments sourced in those countries and held as part of LGAS's long-term insurance fund, (as LGAS contends) or whether its right to credit was limited so that it could only obtain credit to the extent of the corporation tax payable on such proportion of the overall profits of its pension business, in that year, as the foreign income, gross of foreign tax, bore to the overall income (as the Commissioners for Her Majesty's Revenue and Customs ("HMRC") or ("the Revenue") contends).
This is an issue of general application, both inside and outside the life assurance business, which arises in respect of the tax years in question and may have a bearing on the obligations of all commercial enterprises which received foreign income as part of their trades in those years. The right to relief derives from the provisions of double taxation treaties between the United Kingdom and the source countries or, in the absence of such treaty in any particular case, from "deemed" provisions of a treaty under section 790 of Part XVIII of the Income & Corporation Taxes Act 1988 (" ICTA"). I will refer to relief under a double taxation treaty ("DTT") as "treaty relief". I will refer to relief under section 790 as "unilateral relief". I will refer to double taxation relief whether resulting from treaty relief or unilateral relief as "DTR".
On this issue LGAS was successful and HMRC appeal.
The second issue is of interest only to life assurance companies and it concerns whether LGAS is entitled to credit the amount of foreign tax deducted at source in any year of assessment flowing from investments in foreign countries, held as part of the long-term insurance fund in respect of LGAS's pension business, against the corporation tax charged on LGAS's life assurance business generally in that year (as LGAS contends) or whether the credit for that tax is limited so that it can only be credited against the tax on such profit as was made in that year by LGAS's pension business forming part of that life assurance business (as HMRC contend). On this issue HMRC were successful and LGAS appeals. The Commissioners' decisions on issue 1 and issue 2 were the subject of the Interim Decision.
The third issue again concerns insurance companies only and was described by the Commissioners as depending "on the interpretation of section 82(1)(a) of the Finance Act 1989 as modified…It is whether in arriving at the pension business Schedule D Case VI profit in 1992 and 1993 [LGAS] is entitled to a deduction for foreign tax expended on behalf of holders of pension policies in respect of amounts for which it has secured" against corporation tax in respect of pension business profits in the year in question. LGAS contends that it was able to do so notwithstanding that the result was at least partial double relief in respect of the expenditure. HMRC contend that LGAS was not entitled to do so. On this issue HMRC were successful and LGAS appeals.
The issues relate to LGAS's returns for 1990 to 2000 inclusive in respect of which the years 1992 and 1993 were selected as representative of the issues that fell for determination by the Commissioners. The background facts from which the appeals result are set out by the Commissioners in paragraph 4 of the Interim Decision between sub-paragraphs (1) and (35) as follows:-
"Background information on LGAS
(1) Legal & General Assurance Society Limited ("LGAS") is a company registered in England and Wales. LGAS was incorporated on 1 April 1920 under company number 166055. Its authorised share capital is currently £1,000,000,000 divided into 1,000,000,000 ordinary shares of £1 each of which 201,430,403 have been issued and are fully paid.
(2) LGAS has carried on business as a composite insurance company since its incorporation and is authorised in the United Kingdom to conduct both long-term and general insurance business. For the years in issue in this appeal, LGAS was (and continues to be) engaged principally in life assurance and pensions business.
(3) LGAS is a wholly owned subsidiary of Legal and General Insurance Holdings Ltd which, in turn, is a wholly owned subsidiary of Legal & General Group Plc ("L&G Group Plc"). L&G Group Plc is the ultimate holding company of all companies in the Legal and General group ("The Group") and is a listed company, the activities of which encompass life assurance, general insurance, investment management and other financial services.
(4) Accounts for LGAS are prepared to 31 December each year.
The years under appeal
(5) The Tax Reference for LGAS is: 277/ 15005. The Tax District is: City D Large Business Office (LBO) CT. Tax computations and returns for LGAS have been submitted for all years to 2002. The Inland Revenue has agreed all tax computations for years prior to 1990.
(6) The Inland Revenue has issued estimated assessments for 1990 to 1998. Appeals have been lodged against these assessments on the basis that the assessments are estimated, may be excessive and that any profit or loss will be subject to group relief. For the years 1999–2001, the Inland Revenue has raised enquiries under Paragraph 24 (1) Schedule 18 Finance Act 1998.
(7) The matter in issue between the parties relates to all years under appeal and for 1999 and 2000 which are the subject of Inland Revenue enquiries. The 1992 and 1993 years have, however, been selected as representative of the issues that fall for the Commissioners' determination.
(8) Although in each year under appeal LGAS was carrying on a trade of insurance, in every year the Inland Revenue exercised the Crown's option to tax LGAS' life assurance business on what is commonly known as the "I minus E" basis. The Inland Revenue has always so assessed LGAS. The alternative calculation under the Crown option would be to tax all the profits of LGAS' life assurance business in a single Schedule D Case I computation.
(9) The categories of life business that LGAS conducts include basic life assurance (and general annuity) business ("BLAGAB") and pension business. Under the I minus E basis, BLAGAB is taxed by reference to the income and realised capital gains of the business less expenses. Pursuant to s436(1) ICTA 1988, the profits of its pension business are "treated as income within Schedule D, and … chargeable under Case VI of that Schedule" and for that purpose, "the profits therefrom shall be computed in accordance with the provisions… applicable to Case I of Schedule D". Section 438 (2) ICTA 1988 requires pension business receipts to be taken into account in the Schedule D Case VI computation of profits or losses notwithstanding the exemption in section 438 (1) ICTA 1988 for the income and gains of investments referable to pension business. For convenience, the total of these amounts is identified as the 'aggregate I minus E' amount.
Information relating to the years 1992 and 1993
(10) For the years ended 31 December 1992 and 31 December 1993, LGAS wrote the following long term insurance business (as categorised by Schedule 1 to the Insurance Companies Act 1982):
Life and annuity business
Linked long term business
Permanent health business
Capital redemption business
Pension fund management business
Permanent health, capital redemption and pension fund management business do not constitute life assurance business.
(11) LGAS maintained (and continues to maintain) a long term insurance fund ("LTIF") in respect of its long term insurance business. The LTIF consists of -
internal linked investment funds for Basic Life Assurance Business,
internal linked investment funds for Pensions Business, and
non-linked investment funds in respect of the business categories.
(12) The internal linked investment funds (of both Basic Life Assurance Business and of Pension Business) are internal funds of assets which back LGAS's unit-linked life and pension policies respectively. The value of these policies is directly linked to the investment performance of the assets in the respective internal linked funds. This means that, all other things being equal, the receipt of income within the linked funds will result in a corresponding increase in the company's liability to holders of policies backed by the assets within these funds. The benefits to be provided under these policies are determined by reference to the value of these internal funds.
(13) The internal non-linked investment funds...
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