Nuclear Electric Plc v Bradley (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Lord Goff of Chieveley,Lord Jauncey of Tullichettle,Lord Slynn of Hadley,Lord Nicholls of Birkenhead,Lord Hoffmann |
| Judgment Date | 28 March 1996 |
| Judgment citation (vLex) | [1996] UKHL J0328-1 |
| Date | 28 March 1996 |
| Court | House of Lords |
[1996] UKHL J0328-1
House of Lords
Lord Goff of Chieveley
Lord Jauncey of Tullichettle
Lord Slynn of Hadley
Lord Nicholls of Birkenhead
Lord Hoffmann
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Jauncey of Tullichettle. For the reasons he gives I too would dismiss this appeal.
The question in this appeal is whether investment income accruing to Nuclear Electric Plc. (NE) during the year ending 31 March 1991 was trading income against which losses could be set under section 393(8) of the Income and Corporation Taxes Act 1988.
NE, as its name suggests, is a producer and supplier of electricity generated by nuclear power. It was incorporated in January 1990 in order to take over from 1 April of that year the business, plant, assets and trading liabilities of that part of the Central Electricity Generating Board (CEGB) which produced electricity by that method. No provision had been made by the CEGB for the very large trading liabilities taken over by NE and without going into the details thereof suffice it to mention that after making appropriate provision for these liabilities NE incurred a substantial loss for its first year of trading and but for a Letter of Comfort from the Government would have been unable to trade.
The costs of the nuclear fuel required for production fall into three categories. The first relates to the mining and processing of the uranium and its delivery to the reactor (the front-end costs); the second covers the costs, likely to be of a very small amount, arising during the period when the uranium is in the reactor, normally 5 years; and the third, and by far the greatest, relates to the storing and reprocessing of the fuel for reuse and to disposal of the radioactive waste (the back-end costs). These back-end costs are incurred over a very long period of time — up to 100 years in the case of one type of reactor — and NE make provision for meeting them by averaging them over the 5 years over which the fuel is used and attributing a proportion to each year which is then discounted back from the dates when the expenditure is expected to be incurred, and deducted in computing the profit or loss for the relevant year in the quinquennium. The Revenue accept that this is a proper method of accounting.
During its first year of trading ending 31 March 1991 NE invested about £520m. of its trading receipts in the National Loan Fund to make provision for the back-end costs attributable to that year and the income therefrom amounting to some £93m. is the subject of the present appeal. That these costs would ultimately have to be met and that it was accordingly prudent to make provision therefor was not in doubt. However, having invested sums in the National Loan Fund, NE is under no obligation to retain the capital in monetary form. It could invest it in new revenue producing plant or it could use it for some other purpose, not being payment of a dividend, connected with its operations in the event of a change in circumstances whereby it appeared that the back-end costs could be met in some other way.
The special commissioners concluded that the income was not trading income. In reaching that conclusion they were influenced by the fact that the capital sum was not set aside in a segregated fund to which was attached a legal obligation to use capital and income to meet back-end costs incurred in the year of assessment. Sir John Vinelott allowed the appeal, expressing his conclusion in 1995 S.T.C. 285 at p. 305a as follows:
"The income from whatever source it is derived (whether from investments or in the acquisition of new plant or improvement of existing plant) is committed to the discharge of a trading liability derived from current trading which in all foreseeable circumstances will have to be met at a future date. In these circumstances, in my judgment the income falls to be treated as a trading receipt."
The Court of Appeal reversed Sir John Vinelott. After concluding, rightly in my view, that a trader could not convert ordinary investment income into trading income simply by establishing a segregated fund declared to be for the purpose of meeting a particular trading liability, Millett L.J., delivering the judgment of the Court of Appeal, said in [1995] S.T.C. 1125 at 1139j to 1140a:
"The income from investments held by a trader is prima facie investment income; but it may in certain circumstances be brought into account as a trading receipt. Whether it may or may not be so treated depends on the nature of the trade. What the authorities show is that the nature of the trade must be such that it can fairly be said that the making and holding of investments at interest is an integral part of the trade."
He later concluded the judgment at p. 1141g with the statement that the making and holding of investments was not an integral part of the business of generating and supplying electricity by nuclear reaction.
Section 393 so far as relevant to this appeal is in inter alia the following terms:
"393. Losses other than terminal losses
(1) Where in any accounting period a company carrying on a trade incurs a loss in the trade the company may make a claim requiring that the loss be set off for the purposes of corporation tax against any trading income from the trade in succeeding accounting periods; and (so long as the company continues to carry on the trade) its trading income from the trade in any succeeding accounting period shall then be treated as reduced by the amount of the loss, or by so much of that amount as cannot, on that claim or on a claim (if made) under subsection (2) below, be relieved against income or profits of a earlier accounting period.
(8) For the purposes of this section 'trading income' means, in relation to any trade, the income which falls or would fall to be included in respect of the trade in the total profits of the company; but where
( a) in an accounting period a company incurs a loss in a trade in respect of which it is within the charge to corporation tax under Case I or V of Schedule D, and
( b) in any later accounting period to which the loss or any part of it is carried forward under subsection (1) above relief in respect thereof cannot be given, or cannot wholly be given, because the amount of the trading income of the trade is insufficient,
any interest or dividends on investments which would fall to be taken into account as trading receipts in computing that trading income but for the fact that they have been subjected to tax under other provisions shall be treated for the purposes of subsection (1) above as if they were trading income of the trade."
The effect of these two subsections in the circumstances predicated is that investment income which would have been treated as trading income in the computation of the annual profits or gains arising from the taxpayer's trade for the purposes of Case I of Schedule D but for the fact that it has suffered tax under some other provision is to be treated as trading...
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