Legal & General Assurance Society Limited v David Vivian Thomas, SPC 00461
| Jurisdiction | UK Non-devolved |
| Judge | Dr John Avery Jones CBE,Dr A Nuala BRICE |
| Judgment Date | 28 January 2005 |
| Respondent | David Vivian Thomas |
| Appellant | Legal & General Assurance Society Limited |
| Reference | SPC 00461 |
| Court | First-tier Tribunal (Tax Chamber) |
SPC00461
DOUBLE TAXATION RELIEF – whether where the foreign income is taxed on a gross basis but forms an item of income in a Case I computation in the UK, double taxation relief is available against the whole of the UK tax on the Case I profit, or whether it is restricted to the UK tax based on a mini-Case I computation restricted to the foreign income – the former
INSURANCE COMPANY TAXATION – whether double taxation relief is calculated on the whole of the life assurance business or separately on the pension business part of the life assurance business – the latter
LEGAL & GENERAL ASSURANCE SOCIETY LIMITED Appellant
- and -
(HM INSPECTOR OF TAXES)
Special Commissioner: DR JOHN F. AVERY JONES CBE
DR NUALA BRICE
Sitting in public in London on 17, 20-22 December 2004
Malcolm Gammie QC and Daniel Jowell, counsel, instructed by Elaine Herbert for the Appellant
Launcelot Henderson QC and David Ewart, counsel, instructed by the Solicitor of Inland Revenue for the Respondent
© CROWN COPYRIGHT 2005
INTERIM DECISION
-
This is an appeal by Legal & General Assurance Society Limited against estimated assessments to corporation tax for its accounting periods for the calendar years 1990 to 1998, and the Inland Revenue has raised enquiries under paragraph 24 (1) of Schedule 18 to the Finance Act 1998 for the years 1999-2001, of which 1992 and 1993 were chosen as being representative of the other years. The Appellant was represented by Mr Malcolm Gammie QC and Mr Daniel Jowell, and the Inspector was represented by Mr Launcelot Henderson QC and Mr David Ewart.
-
The first, and main, issue in this appeal is how the tax credit for foreign tax is calculated when the foreign country taxes income on a gross basis, for example a dividend (where foreign withholding tax is more likely to arise in practice than for interest), and the UK taxes profits of which the foreign dividend is one of the receipts. The issue can best be described by reference to an agreed example as follows:
Foreign Case I receipt (per foreign tax system) 100.00
Foreign withholding tax (20.00)
Post-foreign tax Case I receipt 80.00
Foreign Case I receipt (per UK tax system 80.00
Foreign tax credit that falls to be allowed 20.00
Foreign Case I receipt entering computation (s.795(2)) 100.00
UK Case I receipts 4,900.00
Foreign Case I receipts 100.00
Total gross income chargeable under Case I 5,000.00
Deductions 4,500.00
Case I profit 500.00
UK tax at 33% (165.00)
Post-tax profit 335.00
-
In outline, Mr Gammie, for the Appellant, contends that credit is available for the full foreign withholding tax of 20 because corporation tax of more than 20 is charged on the profit; Mr Henderson, for the Inspector, contends that the maximum credit is 3.3, the tax on 10, being the same proportion of the profit as the foreign income proportion of the total receipts (although he accepts that other methods of apportionment are possible, and we decided that the correct apportionment should be dealt with as a second stage if it arises). The issue is of general application to the calculation of double taxation relief and has, we understand, been the subject of dispute between taxpayers and the Revenue at least since Yates v GCA International Ltd (1991) 64 TC 37. We were shown by Mr Henderson an article by Mr David Oliver “Unilateral Relief: the Issues in Yates v GCA” [1993] BTR 201; the Chairman drew attention to the article by Mr Philip Baker QC “Some Aspects of United Kingdom Double Taxation Relief” (1998) 52 Bulletin for International Fiscal Documentation 445, which deals with the issue in this appeal; and Mr Gammie gave us an article published while we were sitting by Mr Stephen Edge “Foreign Tax Relief Credit Review for Financial Traders” The Tax Journal, 20 December 2004, commenting on the review of this issue announced in the Pre-Budget Review. The issue is now dealt with for insurance companies in s 804C inserted by the Finance Act 2000.
-
We had a witness statement from Mr Robert Peel, Inland Revenue, Revenue Policy (Business Tax) who also gave evidence explaining the calculation of the deduction, which we shall deal with in relation to issue No.3. There was a statement of agreed facts as follows:
-
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.
-
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.
-
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.
-
Accounts for LGAS are prepared to 31 December each year. Accounts for the years ended 31 December 1992 and 31 December 1993 are attached at Appendices A and B [not reproduced].
-
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
-
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.
-
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. The latest tax computations for the 1992 and 1993 years are attached at Appendices C and D [not reproduced].
-
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.
-
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...
To continue reading
Request your trial