Prudential Assurance Company Ltd v Bibby (HM Inspector of Taxes) (No 2)
| Jurisdiction | England & Wales |
| Judgment Date | 24 May 1999 |
| Date | 24 May 1999 |
| Court | Special Commissioners |
special commissioners decision
STEPHEN OLIVER QC; T H K EVERETT
Corporation tax - Proprietary insurance company - Pension business - Proceeds of sale of "own purchase" of shares attributable to pension business - Tax credit on distribution element - Whether insurance company entitled to repayment of tax credit - Whether insurance company a "dealer" in relation to those shares - Income and Corporation Taxes Act 1988 section 95 subsec-or-para (1) section 436 subsec-or-para (1)Income and Corporation Taxes Act 1988 ss. 95(1), 436(1)
STEPHEN OLIVER QC:
1. This is an appeal by The Prudential Assurance Company Limited ("The Prudential") against an assessment made on 2 December 1998 underIncome and Corporation Taxes Act 1988 section 252Section 252 of the Income and Corporation Taxes Act 1988 ("ICTA 1988") in the amount of £282,974.29. The assessment was made to recover part of a tax credit attaching to a distribution made by Eastern Group plc (formerly Eastern Electricity plc) on the occasion of the purchase by "Eastern" of its own shares from The Prudential in January 1995, as set out below. The Inland Revenue had previously paid the appropriate part of the tax credit to The Prudential on the basis that it was entitled to it as a result of the exemption from tax under Income and Corporation Taxes Act 1988 section 438Section 438 of ICTA 1988given to its pension business.
2. The Prudential was incorporated on 5 August 1848 under the name Prudential Investment Loan & Assurance Association as a mutual insurer. In 1881 it became a joint stock company (a limited liability company under modern company law). The Prudential is a wholly-owned subsidiary of Prudential Corporation plc.
3. At the relevant time The Prudential carried on in the United Kingdom long-term insurance business, i.e. life and annuity, linked long term, permanent health, capital redemption and pension fund management, being classes of such business as set out in Schedule 1 to the Insurance Companies Act 1982. The Prudential's, principal business comprised the writing of life assurance and pension business on both an individual and a group basis. Its life assurance and pensions business is divided into two business classes:
·industrial business, which deals with regular premium assurance mainly on a cash collection basis, and
·ordinary business, being single and regular premium life assurance, pension and annuity business.
This appeal is concerned solely with The Prudential's ordinary life assurance and pension business.
4. The Prudential is subject to the provisions of ICTA 1988 relating to insurance companies. All statutory references in this decision are to that Act unless otherwise stated. In relation to those provisions -
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(a) The Prudential has since 1915 (when management expenses relief for life companies was first introduced) been assessed and charged to tax in respect of its life assurance business on the so called "I minus E" basis, which applies when life assurance business is not charged to tax under Case I of Schedule D; and
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(b) accordingly, at no time since then has an assessment to income tax or corporation tax been made on The Prudential in respect of its life assurance business charging the profits of that business under Case I of Schedule D.
5. On 11 December 1990 HM Government offered for sale shares of the regional electricity companies. The shares were issued in partly paid form and the public could acquire both the shares in individual companies and package units comprising shares in all the regional electricity companies. The Prudential acquired shares in Eastern and package units. The package units were split into their individual companies following payment of the final instalment on 15 September 1992. On that date the total holding by The Prudential of Eastern shares was 14,352,750 fully paid ordinary shares of 50p each. The entire holding was in the life fund of The Prudential backing its ordinary life assurance and pensions business.
6. The only transaction by The Prudential in Eastern shares during the period 15 September 1992 to 19 January 1995 was the acquisition of a further 110,000 ordinary shares on 21 May 1993. Accordingly, on 20 January 1995 The Prudential owned 14,462,750 ordinary shares in Eastern. On 20 January 1995 Eastern offered to acquire 7,739,402 of its shares from its shareholders. The Prudential were informed of the offer over the telephone by the brokers dealing with it. The terms were for purchase at 720 pence per share. The Prudential applied to sell 2 million Eastern shares (i.e. 14 per cent of its shareholding) under the buyback offer. It was restricted to 390,494 shares which were duly sold on 20 January 1995. The gross consideration received by The Prudential from the sale was £2,811,556.80. This sum is divided, for tax purposes, as follows:
£
Capital repayment 199,151.94
Distribution 2,612,404.86 Tax credit £653,101.22
Total 2,811,556.80
7. The Prudential claimed to have the appropriate amount of the tax credit paid to it. The amount claimed (i.e. £282,974 out of the total tax credit of £653,101) matched the due proportion of the total distribution falling within The Prudential's pension business-referable income. The statutory provisions (in force at the time) upon which the claim was based are these:
·Income and Corporation Taxes Act 1988 section 438 subsec-or-para (1)Section 438(1) allows exemption from corporation tax in respect of the income from investments of so much of an insurance company's long-term business fund as is referable to pension business. (That exemption does not operate to exclude sums representing that income being taking into account in the computation of the insurance company's profits or losses for corporation tax purposes:Income and Corporation Taxes Act 1988 section 438 subsec-or-para (2)section 438(2).)
·Income and Corporation Taxes Act 1988 section 438 subsec-or-para (4)Section 438(4) entitled the insurance company to claim payment of tax credits attaching to distributions to the extent that they fell within its pension business-referable income.
·Where, as here, shares have been held in the life fund to back both pension and other categories of business written by The Prudential, any distribution and associated tax credit must be apportioned between the categories in accordance with the rules found in Income and Corporation Taxes Act 1988 section 432Asection 432A to determine the amount referable to pension business for the purposes of the Income and Corporation Taxes Act 1988 section 438 subsec-or-para (4)section 438(4) claim.
·Income and Corporation Taxes Act 1988 section 438ASection 438A and Schedule 19AB allow Income and Corporation Taxes Act 1988 section 438 subsec-or-para (4)section 438(4) claims to be made on a provisional basis in advance of final determination of the corporation tax liability of the insurance company for the accounting period.
8. The Prudential included the pension business-referable element of the £653,101 tax credit arising on the sale of the Eastern shares within itsIncome and Corporation Taxes Act 1988 schedule HSchedule 19AB claim. This was paid without restriction by the Inland Revenue in May 1995 and consistently with a view of the law held at the relevant time as stated in paragraph 1763 of the Inland Revenue's Corporation Tax Manual.
9. At a later date the Inland Revenue formed the view thatIncome and Corporation Taxes Act 1988 section 95section 95 applied to The Prudential's sale of the Eastern shares; on this basis the Inland Revenue concluded that The Prudential was not entitled to any payment of the tax credit. On 2 December 1998, therefore, the Inspector issued the assessment appealed against.
The statutory framework and the relevant principles governing the charge to tax on life assurance companies generally
10. The parties agreed that the only issue in this appeal is whetherIncome and Corporation Taxes Act 1988 section 95section 95 precludes The Prudential's claim under Income and Corporation Taxes Act 1988 section 438 subsec-or-para (4)section 438(4) to payment of the tax credit attributable to its pension business. Before we examine Income and Corporation Taxes Act 1988 section 95section 95 and its application to the present situation, we need to summarise the framework, as it existed in January 1995 when the present transaction took place, within which the long-term business of an insurance company is taxed. This has been built partly on decisions of the courts, partly on statutory provisions and partly on working principles.
·Insurance business is a trade for tax purposes. This was originally established in the House of Lords decisions in 1889 in Scottish Union and National Insurance Company v Smiles 2 TC 551 and in Northern Assurance & Co v Russell, 2 TC 571. The statutory provisions in the Taxes Acts covering the taxation of trading companies apply to an insurance company in the same way as they apply to other trading companies, except where the law has been modified by special provisions relating to insurance companies only.
·The Prudential is a composite insurance company with a range of insurance activities. As such it is required by Income and Corporation Taxes Act 1988 section 432 subsec-or-para (1)section 432(1) to separate its life assurance business, which includes general annuity and pension business, from the other categories of insurance business carried on by it.
·The computation, for the purposes of the Case I of Schedule D tax charge, of trading profits of a life insurance company such as The Prudential requires the value of its long-term insurance contracts to be brought into the...
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