Scottish Widows Plc V. The Commissioners For Her Majesty's Revenue And Customs Under Secton 56a Of The Taxes Management Act 1970
| Jurisdiction | Scotland |
| Judge | Lord Reed,Lord President,Lord Emslie |
| Judgment Date | 28 May 2010 |
| Neutral Citation | [2010] CSIH 47 |
| Court | Court of Session |
| Published date | 28 May 2010 |
| Docket Number | XA31/08 |
| Date | 28 May 2010 |
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION | |
| Lord President Lord Reed Lord Emslie | [2010] CSIH 47 XA31/08 OPINION OF THE LORD PRESIDENT in the Appeal by SCOTTISH WIDOWS plc Appellant: against THE COMMISSIONERS FOR Her Majesty's Revenue and Customs Respondents: under section 56A of the Taxes Management Act 1970 _______ |
28 May 2010
The question referred
[1] Scottish Widows plc ("the Company") and the Commissioners for Her Majesty's Revenue and Customs ("HMRC") made a joint referral under paragraph 31A of Schedule 18 to the Finance Act 1998 of a question which had arisen in connection with an enquiry into the Company's tax returns for the accounting periods ending 31 December 2000, 2001 and 2002. The agreed question for determination was:
"Whether in computing the Case I profit or loss of [the Company] for the accounting periods ending in 2000, 2001 and 2002, amounts described by the Company as 'transfers from Capital Reserve" and included as part of the entries at line 15 of Form 40 for each period fall to be taken into account in computing the profit or loss as the case may be".
It is agreed that the words "as receipts" can appropriately be read in after the words "into account".
[2] The Special Commissioners (J Gordon Reid, Q.C. and John F Avery Jones) answered the question in the affirmative. Against that determination the Company has appealed, under section 56A of the Taxes Management Act 1970, to this court.
The Statement of Agreed Facts
[3] In the course of the proceedings before the Special Commissioners the parties entered into a Statement of Agreed Facts. It was in the following terms:
"The Society
(1) In 1814 the Scottish Widows' Fund and Life Assurance Society ('the Society') was formed at Edinburgh 'upon the Principle of mutual Assurance'. Subsequently, the Society was incorporated under the Scottish Widows Fund and Life Assurance Society's Incorporation Act 1861.
(2) At all times material to this referral, the Society was governed by the Scottish Widows' Fund and Life Assurance Society Act 1980, which provided its constitution and regulations.
(3) At all material times, the Society was a company without share capital owned by its members.
(4) As permitted by its regulations, the Society wrote both 'with profits' policies (or 'participating' policies), which entitled a member holding such a policy to participate in the Society's distributed profits, and also 'without profits' policies (or 'non-participating' policies).
(5) By section 17 of the Scottish Widows' Fund and Life Assurance Society Act 1980, it was provided that, on a dissolution, surplus assets were to be distributed among its members.
(6) The Society was authorized under section 4 of the Insurance Companies Act 1982 to transact long-term insurance business in the UK in the following classes (as specified in Schedule 1 to that Act): Class I (Life and annuity); Class II (Marriage and birth); Class III (Linked long term); Class IV (Permanent health); Class VI (Capital redemption); and Class VII (Pension fund management).
(7) The Society maintained a single long-term fund in respect of its long-term business pursuant to section 28 of the Insurance Companies Act 1982.
The Company and the Scheme of Transfer
(8) Early in 1999, the Lloyds TSB group (of which Lloyds TSB Group plc is the ultimate parent) approached the Society with a view to acquiring the latter's business and, on 23 June 1999, the Society and Lloyds TSB Group plc entered into an agreement for the transfer of the Society's business to subsidiaries of the Lloyds TSB group.
(9) That transfer was conditional on, inter alia: an order by the Court, pursuant to section 49 and Part 1 of Schedule 2C to the Insurance Companies Act 1982, sanctioning a scheme of transfer; requisite regulatory approvals (including approval by the Financial Services Authority ('the FSA')); and approval by the Society's members.
(10) The acquisition of the business was proposed entirely for bona fide commercial reasons and neither party had any tax-avoidance or tax-mitigation motive for it.
(11) Scottish Widows plc ('the Company'), Scottish Widows Financial Services Holdings Limited ('the Parent Co'), and Scottish Widows Annuities Limited ('the Subsidiary Co') were each incorporated in 1999 and were acquired 'off-the-shelf' by and ultimately owned by the Lloyds TSB group.
(12) The Company is a UK-resident company, incorporated in Scotland and is a wholly-owned subsidiary of the Parent Co. The Subsidiary Co is a wholly-owned subsidiary of the Company.
(13) On 28 February 2000, the Court of Session sanctioned, pursuant to section 49 and Part 1 of Schedule 2C to the Insurance Companies Act 1982, a scheme for the demutualization of the Society and the transfer of its business to the Company (and to the Subsidiary Co) ('the Scheme').
(14) At all material times prior to the implementation of the Scheme, the Society carried on mutual insurance business, consisting mainly of mutual life assurance business.
(15) At all material times prior to the implementation of the Scheme, the value of the Society's assets was substantially in excess of its liabilities (see paragraphs (37) and (38) below) and, had there been a dissolution of the Society, a substantial surplus would have been distributable among its members. At 31 December 1999, the excess of the Society's admissible assets over its liabilities shown in its FSA return was £5,804 million (see lines 13 and 51 of Form 14 of the Society's return for year ended 31 December 1999).
(16) The Scheme came into effect on 3 March 2000.
(17) The terms of the Scheme provided for the transfer of the Society's business to the Company (with the exception of certain without-profits pension business to be transferred to the Subsidiary Co).
(18) The Scheme provided for the membership rights of the Society's members to cease and for the Company to become the Society's sole member (paragraph 38); and, in consequence, for the Society's members to receive compensation from the Lloyds TSB group (paragraph 12 of the Scheme).
(19) It was provided that UK members would receive, as membership compensation, redeemable shares issued by the Parent Co and that overseas members would receive cash. The redeemable shares would then be exchanged for cash; alternatively, there was an option for UK members to receive compensation in the form of loan notes which would be subsequently repaid (this option is described in the Policyholder Circular at pp.3, 17-18 and 60-61).
(20) Application for clearance for the Scheme was made under sections 211, 138 and 139 of the Taxation of Chargeable Gains Act 1992 and section 444A of the Income and Corporation Taxes Act 1988 and such clearance was given on the basis that H.M. Revenue and Customs were satisfied that the transactions would be 'effected for bona fide commercial reasons and [did] not form part of a scheme or arrangement[s] of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax'.
(21) The Scheme also provided, among other things, for the establishment of a 'Long Term Fund' of the Company (the fund maintained for its long-term insurance business for the purposes of section 28 of the Insurance Companies Act 1982) and provided for the Company to establish and maintain, for management and accounting purposes, two separate sub-funds of the Long Term Fund: a 'With Profits Fund' and a 'Non Participating Fund'.
(22) The liability to provide benefits under policies transferred to the Company was allocated between those two sub-funds, principally by reference to whether or not the benefits were with-profits (paragraph 14 of the Scheme).
(23) The Company's assets and other liabilities were also allocated between the two sub-funds, with provision for the allocation of goodwill, intellectual property rights and shares in subsidiaries to a separate 'Shareholders' Fund', outside the long-term fund (paragraphs 15 and 16 of the Scheme).
(24) The With Profits Fund was, amongst other assets, allocated a contingent asset representing the future cashflows on business in-force at the time of demutualization ('the Right to Future Surplus'). As a result of the contingent nature of that asset, its value was not admissible for satisfying the regulatory solvency requirements; it was provided that the Non Participating Fund would make a non-interest-bearing loan to the With Profits Fund of admissible assets with repayment contingent on surplus emerging (paragraph 22A of the Scheme); the loan is repayable as the future profits on the relevant in-force business arise (paragraphs 21 and 22A of the Scheme).
(25) The With Profits Fund is a so-called '90/10' fund and the surplus must be applied for the benefit of the with-profits policyholders, save for one ninth of any surplus allocated to conventional with-profits policies (subject to certain restrictions) to which the Non Participating Fund or the Shareholders' Fund is entitled (paragraph 18 of the Scheme).
(26) In contrast, the Non Participating Fund is a '0/100' fund: amounts from it may be transferred to the Shareholders' Fund, subject to requirements to retain minimum amounts of capital to support the with-profits and without-profits business.
(27) The effect of the Scheme was to procure the transfer of the business to the Company in consideration of the Lloyds TSB group procuring the payment of the compensation to the members. The mechanics of the Scheme, to achieve that objective, can be summarized as follows.
o Lloyds TSB Group plc and the Society entered into the transfer agreement referred to in paragraph (8) above.
o That agreement provided that the Society's business would be transferred to two subsidiaries of the Lloyds TSB group.
o The agreement further provided that Lloyds TSB Group plc would pay or procure...
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