Michael Eunan Deeny and Others v Gooda Walker Ltd and Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE PETER GIBSON,LORD JUSTICE SAVILLE,LORD JUSTICE SIMON BROWN |
| Judgment Date | 05 October 1995 |
| Judgment citation (vLex) | [1995] EWCA Civ J1005-11 |
| Docket Number | NO:95/01310/B |
| Court | Court of Appeal (Civil Division) |
| Date | 05 October 1995 |
[1995] EWCA Civ J1005-11
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM: QUEENS BENCH DIVISION
(Potter J)
Before: Lord Justice Simon Brown Lord Justice Peter Gibson and Lord Justice Saville
NO:95/01310/B
MR B EDER QC and MR P BAKER and MR S BRYAN (instructed by Messrs Elborne Mitchell, 1 America Square, Crosswall, London EC3) appeared on behalf of the Appellant.
MR G VOS QC and MR J WALTERS and MR D LORD (instructed by Messrs Wilde Sapte, 1 Fleet Place, London EC4) appeared on behalf of the Respondents.
MR I GLICK QC and L HENDERSON QC (instructed by The Solicitor's Office, Inland Revenue, Somerset House, London WC2) appeared on behalf of the Inland Revenue.
Thursday, 5th October 1995
.
In Baron Napier and Ettrick v R.F. Kershaw Ltd. (unreported, 14 May 1992) Saville J refused to consider whether money received by a name in settlement of Lloyd's litigation was to be taken into account in assessing the name's liability for tax, as the meaning and effect of tax statutes and regulations represented a quagmire into which one should avoid treading unless absolutely necessary. On this appeal absolute necessity has driven this court into that quagmire. But it is appropriate that I should express my gratitude for the brave rescue efforts of Mr Eder QC for the appellants, Mr Glick QC for the Commissioners of Inland Revenue ("the Revenue") and Mr Vos QC for the plaintiffs. Their admirable arguments, both written and oral, have enabled me to reach what I hope is solid ground for the decision which I have reached.
This appeal raises the question of how damages should be treated for tax purposes in the hands of plaintiffs to whom they have been awarded. That question has been considered and answered before but in other contexts. The context in which the question arises in the present case differs from that of any of the earlier cases. Potter J however applied principles laid down in certain earlier cases in upholding the arguments of the Revenue, supported as they were by the plaintiff names, (i) that damages recovered in the plaintiffs' action against the defendant managing agents and members' agents are subject to income tax under Schedule D in the plaintiffs' hands and (ii) that such damages are not to be reduced by the amount of any tax saving achieved by the plaintiffs in connection with their Lloyd's underwriting business. Certain of the defendants, namely most of the members' agents but not the managing agents who are in liquidation, now appeal on the first point alone.
Lloyd's is a society of individual underwriting members, known as names. Insurance is effected by names grouped in syndicates. Some names are themselves underwriting agents and are known as working names. The vast majority effect contracts of insurance through underwriting agents, acting for the names who are known as external names. Members' agents are underwriting agents who advise names on their choice of syndicates, place names on the syndicates chosen by them and give them general advice. Managing agents are underwriting agents who manage one or more Lloyd's syndicates, underwriting contracts of insurance at Lloyd's on behalf of the names in their syndicates and reinsuring contracts of insurance. Some underwriting agents combine the roles of members' agents and managing agents.
The plaintiffs were the majority of the names on syndicates 164, 290, 298 and 299 and suffered heavy underwriting losses—
as members of syndicates 298 and 299 in 1988 and 1989, as members of syndicate 290 in 1989 and 1990, and as members of syndicate 164 in 1990.
Syndicates 164 and 290 were managed by the first defendant, syndicates 298 and 299 by the second defendant. The other defendants were members' agents of the plaintiffs. The plaintiffs sued the defendants, claiming damages in tort and in contract for the failure by the defendants to exercise reasonable skill and care in conducting the business of underwriting on behalf of the plaintiffs. On 4 October 1994 Philllips J awarded damages to the plaintiffs against the defendants. We have been told that the value of that award (with interest) is of the order of £300 million.
I can take from Potter J's judgment ( reported at [1995] S.T.C. 439) his summary of what Philllips J decided (see pp. 441,2):
"In giving judgment in relation to the assessment of damages Philllips J decided that the plaintiffs were entitled to that award of damages which would place them in the same position as if the underwriting carried out on their behalf by each syndicate had been competently performed….[H]e decided that—
"… the Plaintiffs should recover by way of damages such sums as will put them in the same position as if this exposure had been protected by reinsurance."
So far as the assessment of loss was concerned Philllips J ruled that the starting point must be to compare claims relating to a catastrophe with the reinsurance cover available to meet those claims. However, he ruled that not all the shortfall would be recoverable, since it was not all attributable to the inadequacy of the vertical extent of cover, deductions falling to be made for various categories of loss set out in his judgment, including reduction by a percentage to reflect the notional premium which would have been payable for the reinsurance which would have taken place. He also ruled that certain consequential losses would be recoverable ….
Finally, he rejected the argument of the defendants, that those plaintiffs who had taken out stop-loss policies which had indemnified them in whole or in part for the losses sought to be recovered in this action should bring such proceeds into account."
Sensibly, the Revenue were joined by consent to argue the tax issue before Potter J. Mr Glick has told us that this is the first time this has happened in relation to a dispute over damages, not being a tax appeal.
I must now set out the most important of the relevant statutory provisions. The charging provisions are to be found in ss. 1 and 18 Income and Corporation Taxes Act 1988 ("the Taxes Act").
By s.1(1):
"Income tax shall be charged in accordance with the provisions of the Income Tax Acts in respect of all property, profits or gains respectively described or comprised in the Schedules, A,…C,D,E and F, set out in sections 15 to 20 or which in accordance with the Income Tax Acts are to be brought into charge to tax under any of those Schedules or otherwise."
S.18(1) provides that income tax under Schedule D shall be charged in respect of—
"(a) the annual profits or gains arising or accruing—
……
(ii) to any person residing in the United Kingdom from any trade …., whether carried on in the United Kingdom or elsewhere, and
(iii) to any person, whether a Commonwealth citizen or not, although not resident in the United Kingdom …. from any trade …. exercised within the United Kingdom".
By s.18 (2):
"Tax under Schedule D shall be charged under the Cases set out in subsection (3) below, and subject to and in accordance with the provisions of the Tax Acts applicable to those Cases respectively."
By s.18 (3):
"The Cases are—
Case I: tax in respect of any trade carried on in the United Kingdom or elsewhere …."
In consequence of those provisions income tax is chargeable under Case I of Schedule D on the annual profits or gains accruing to any person, whether resident in the UK or not, from any trade carried on in the UK or, if that person resides in the UK, elsewhere. Those profits or gains are the surplus of the revenue receipts of the trade over revenue expenditure wholly and exclusively laid out or expended for the purposes of the trade (s.74(1)(a) of the Taxes Act).
Post-cessation receipts fall within the special statutory regime of ss. 103-110 of the Taxes Act. As Potter J said (at p.445), their purpose and effect are essentially to assimilate the taxation of sums received after cessation with the taxation of sums received before cessation.
Special statutory provisions have been enacted in relation to the taxation of Lloyd's names. By s. 171 Finance Act 1993:
"(1) Income tax for any year of assessment on the profits arising from a member's underwriting business shall be computed on the profits of that year of assessment.
(2) As respects the profits arising to a member from his underwriting business for any year of assessment-
(a) the aggregate of those profits shall be chargeable to tax under Case I of Schedule D".
The terms "member"and "underwriting business" are defined in s.184(1) of the Finance Act 1993 as amended:
""member" means an individual who is a member of Lloyd's and is or has been an underwriting member;
"underwriting business" in relation to a member, means his underwriting business as a member of Lloyd's, whether carried on personally or through an underwriting agent, and does not include any other business carried on by him, and in particular, where he is himself an underwriting agent, does not include his business as such an agent".
By the combined effect of ss. 171(1), 172(1), 184(1) and (2)(a) Finance Act 1993 tax for any year of assessment ending on 5 April is charged by reference to the profits of the underwriting year ending on the preceding 31 December. Thus the profits of the underwriting year (the calendar year) 1993 will be charged to tax in the year 1993/94. In this respect names are unlike other sole traders who are charged to tax on a preceding year basis.
S.172(1) Finance Act 1993 allocated profits or losses of a name's underwriting business to a year of assessment....
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