Legal & General Assurance Society Ltd v Revenue and Customs Rev 1

Double taxation relief permits foreign tax to be credited against United Kingdom corporation tax computed by reference to the same foreign income, subject to the statutory ceiling. It does not require an additional “mini Case I” calculation attributing only part of the company’s overall profit to that income where the foreign income enters the relevant computation.

For life assurance companies, pension business is separately chargeable under Schedule D Case VI, with profits computed on Case I principles. Foreign tax attributable to that business is therefore creditable against the tax charged on its pension-business profits. A deduction for foreign tax under Finance Act 1989, section 82(1)(a), is unavailable to the extent that the amount has been recouped through double taxation credit relief.

Legal & General Assurance Society Ltd appealed against two decisions of the Special Commissioners concerning its corporation tax returns for 1990 to 2000, with 1992 and 1993 treated as representative years. The disputes concerned foreign tax deducted from investment income connected with the company’s long-term insurance fund.

The first issue was whether treaty and unilateral double taxation relief was available against corporation tax on the company’s overall pension-business profits, or only against tax attributable to the profit derived from the foreign income. The second concerned the tax against which foreign tax attributable to pension business could be credited. The third concerned whether the same foreign tax could also be deducted as an expense in computing pension-business profits.

1. Issue 1—double taxation relief. The Revenue’s appeal was dismissed. Article 24 of the relevant treaty, read with sections 788, 790, 793, 795 and 797 of Income and Corporation Taxes Act 1988, required the foreign income on which foreign tax was charged to enter the computation of the United Kingdom tax against which credit was claimed. It did not require a separate calculation of the corporation tax attributable only to the profit referable to that foreign income.
2. The word “any” in the treaty provision supported credit against United Kingdom corporation tax arising from a computation into which the foreign income entered. Section 797 imposed the relevant ceiling: credit could not exceed the United Kingdom corporation tax chargeable, at the appropriate rate, on the foreign income grossed up by the foreign tax. Section 797(3) permitted allocation of specified deductions to the foreign income, but did not impose the Revenue’s proposed apportionment.
3. The approach in George Wimpey International Ltd v Rolfe (1989) 62 TC 597 did not require the Revenue’s result. That case concerned separate schedular computations, including loss-making trading operations. Its statement that double taxation relief seeks to prevent tax being charged twice on the same income supported the taxpayer’s construction. The wording of the treaty and legislation was materially different from OECD Model Article 23B, and no “mini Case I” machinery could properly be implied.
4. Issue 2—pension business. The company’s appeal was dismissed. Sections 431(2), 432A to 432E, 436 and 438 of Income and Corporation Taxes Act 1988 created a special regime under which pension business was treated separately and charged under Schedule D Case VI, with profits computed on Case I principles. Foreign tax on income attributable to pension business was therefore creditable against the tax charged on those pension-business profits.
5. Issue 3—deduction of foreign tax. The company’s appeal was dismissed. Section 82(1)(a) of Finance Act 1989, as modified and amended, allowed foreign tax expended on behalf of pension policyholders to be taken into account as an expense only so far as it was not otherwise taken into account. “Expended” and “expense” could properly be construed to exclude amounts recouped, or anticipated to be recouped, through credit relief. Parliament could not be presumed to have intended double relief where the statutory language admitted that construction.

The judgment determined appeals from two decisions of the Special Commissioners dated 28 January 2005 and 19 July 2005. The Revenue’s appeal on issue 1 and LGAS’s appeals on issues 2 and 3 were dismissed.