Nuclear Electric Plc v Bradley (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 17 October 1995 |
| Date | 17 October 1995 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Sir Thomas Bingham MR, Millett and Schiemann L JJ.
John Gardiner QC, Jonathan Peacock and Rabinder Singh (instructed by the Solicitor of Inland Revenue) for the Crown.
Graham Aaronson QC and Joseph Hage (instructed by Mr C Johnson, Legal Department, Nuclear Electric) for Nuclear Electric.
The following cases were referred to in the judgment:
Bank Line Ltd v IR Commrs TAX(1974) 49 TC 307
Clerical, Medical and General Life Assurance Co v Carter ELR(1989) 22 QBD 444
Colonial Mutual Life Assurance Society Ltd v Federal Commr of Taxation UNK(1946) 73 CLR 604
Davies (HMIT) v Shell Co of China Ltd TAX(1951) 32 TC 133
General Reinsurance Co v Tomlinson WLR[1970] 1 WLR 566
IR Commrs v Butterley Co Ltd TAX(1956) 36 TC 411
Liverpool and London and Globe Insurance Co v Bennett (Surveyor of Taxes) TAX(1913) 6 TC 327
Northern Assurance Co v Russell TAX(1889) 2 TC 571
Owen (HMIT) v Sassoon TAX(1951) 32 TC 101
Punjab Co-operative Bank, Amritsar v Income Tax Commr ELR[1940] AC 1055
Royal Insurance Co v Stephen TAX(1928) 14 TC 22
Westminster Bank Ltd v Osler (HMIT) ELRELR[1932] 1 KB 668 (CA), [1933] AC 139 (HL)
Corporation tax - Loss relief - Trading losses - Trading liabilities arising in current year but payable in future years - Projected cost of decommissioning reactors and disposing of spent nuclear fuel over 80 years - Funds set aside to cover future liabilities but not segregated specifically for that purpose - Whether income from invested funds to be regarded as "trading income" - Income and Corporation Taxes Act 1988 section 393 subsec-or-para (8)Income and Corporation Taxes Act 1988, s. 393(8).
This was an appeal by the Revenue against a decision of Sir John Vinelott ([1995] BTC 186) that income from surplus funds, intended to be used to meet the future costs of de-commissioning nuclear reactors and storing and processing spent nuclear fuel over a projected period of 80 years, was to be regarded as trading income within the meaning of the Income and Corporation Taxes Act 1988 section 393 subsec-or-para (8)Income and Corporation Taxes Act 1988, s. 393(8).
In April 1990 the taxpayer ("NE") took over production of electricity from nuclear fuel from the Central Electricity Generating Board.
A nuclear reactor had a life of about 30 years, after which it had to be shut down and de-commissioned over a period as long as 100 years. No provision was made for the de-commissioning costs but the government undertook to provide assistance up to a specified amount if NE was unable to meet them from its own resources.
However, provision in NE's accounts was made for the cost over about 80 years of storing and reprocessing spent fuel. That was done by averaging the cost, allowing for inflation, over a five-year period during which the fuel was used in the reactor. The proportion attributable to any given year was then discounted back from the dates when the expenditure was expected to be incurred. A rate of two per cent was used in making that calculation. The discounted amount attributable to a year was then deducted in ascertaining the profit or loss from the proceeds of electricity generated in that year.
Amounts were set aside for future liabilities and invested in securities, but the money was not placed in a segregated fund.
On NE's appeal against the Revenue's refusal to treat the income from the invested funds as trading income in the year to 31 March 1991, the special commissioners accepted that if NE had been bound to set aside a sum to meet the discounted liability and to invest it in a fund which could only be used with its income for that purpose, the income would have been a trading receipt. They accepted the Revenue's submission that in the absence of such a segregated fund, income from investments could only be treated as a trading receipt if the commercial requirements of the trade made it necessary for practical purposes that a fund of investments be maintained to meet the liabilities of the trade and that the income would in fact be used for that purpose.
The special commissioners decided that NE was not able to demonstrate that the interest would be used to meet the specific liabilities over a period as long as 80 years. Accordingly they concluded that the interest was not trading income and dismissed the appeal.
The High Court, however, allowed NE's appeal, holding that the income was a trading receipt.
The Revenue appealed to the Court of Appeal contending that the character of investment income was determined by the nature of the trade. Income from securities was trading income only where the securities were held as trading stock or as part of a financial trade such as insurance or banking. Alternatively, if the principle was of wider application, it only applied where the nature of the trade itself was such that the making and holding of investments was an integral part of the trade.
NE contended that the provisions for future costs were revenue liabilities arising directly out of NE's trade; that the primary purpose for which the investments were held was to provide for such liabilities; and that it was NE's intention to apply the investments together with the income to meet those liabilities. Since the amount was discounted to represent the current value of liabilities to be discharged in the future, the interim income from the assets set aside to meet those liabilities was an essential part of the arrangements made to meet them.
Moreover, during the relevant year of account, NE would be insolvent if the decommissioning costs were taken into account. The deficit on profit and loss account would be so large that as a practical matter the interest on the invested funds would inevitably be required to meet it. Therefore, there was no need to demonstrate that the investment income was committed by a segregated fund to discharging the trading liabilities: all its funds were required for that purpose.
Held, allowing the Revenue's appeal:
1. The income from investments held by a trader was prima facie investment income, whether or not it was held in a segregated fund, but might in certain circumstances be brought into account as a trading receipt. The decisive test was whether the holding of investments was an integral part of the trade in question. Liverpool and London and Globe Insurance Co v Bennett (Surveyor of Taxes) TAX(1913) 6 TC 327 distinguished.
2. The making and holding of investments was not an integral part of the business of generating electricity by nuclear reaction. It followed therefore that the investment income of NE was not to be treated as a trading receipt.
When does investment income fall to be taken into account as a trading receipt? That is the question which arises on this appeal from an order of Sir John Vinelott sitting as a judge of the Chancery Division. He reversed a decision of the special commissioners and held that interest earned on bank deposits made by the taxpayer, Nuclear Electric plc ("NE"), in the year to 31 March 1991 was trading income within the meaning of Income and Corporation Taxes Act 1988 section 393 subsec-or-para (8)s. 393(8) of the Income and Corporation Taxes Act 1988 ("the Act") with the result that Income and Corporation Taxes Act 1988 section 393 subsec-or-para (1)s. 393(1) of the Act permitted trading losses carried forward from earlier accounting periods to be set off against it for the purposes of corporation tax. The Inland Revenue now appeals to this court. The judgment which follows is a judgment of the court.
So far as material Income and Corporation Taxes Act 1988 section 393s. 393 of the Act provides as follows:
393(1) Where in any accounting period a company carrying on a trade incurs a loss in the trade, the loss shall 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 … be relieved against income or profits of an earlier accounting period.
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…
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(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 Income and Corporation Taxes Act 1988 section 393 subsec-or-para (1)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,
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(8) 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 Income and Corporation Taxes Act 1988 section 393 subsec-or-para (1)subsection (1) above as if they were trading income of the trade.
The effect of these provisions may be summarised as follows: while trading losses may be set off under other provisions of the Act against any income of the taxpayer whether trading income or investment incomeof the same accounting period (this is commonly known as sideways relief) trading losses incurred in one accounting period may be carried forward and set against income of the taxpayer in a later accounting period but only against trading income of the same trade; and for this purpose trading income includes investment income but only where such income may properly be...
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