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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Legal & General Assurance Society Ltd v Revenue and Customs Rev 1 [2006] EWHC 1770 (Ch) (14 July 2006) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2006/1770.html Cite as: [2006] EWHC 1770 (Ch), [2006] STC 1763, [2006] BTC 713, 8 ITL Rep 1124, 78 TC 321, [2006] STI 1884

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		CH/2005/APP/0637 Royal Courts of Justice Strand, London, WC2A 2LL
		14/07/2006

Mr Justice Evans-Lombe :

1. This is an appeal from two decisions of the Special Commissioners ("the Commissioners") in tax matters, the first, the "Interim Decision", dated the 28^th January 2005, the second dated the 19^th July 2005. The proceedings before the Commissioners raised three issues all of their decisions upon which are appealed to this court. The first and main issue is whether Legal & General Assurance Society Ltd ("LGAS") was entitled in the relevant years to credit against the amount of corporation tax payable in respect of any year of assessment on its profits from its pension business generally, tax deducted at source by the authorities in foreign countries, on the relevant parts of its income from investments sourced in those countries and held as part of LGAS's long-term insurance fund, (as LGAS contends) or whether its right to credit was limited so that it could only obtain credit to the extent of the corporation tax payable on such proportion of the overall profits of its pension business, in that year, as the foreign income, gross of foreign tax, bore to the overall income (as the Commissioners for Her Majesty's Revenue and Customs ("HMRC") or ("the Revenue") contends).
2. This is an issue of general application, both inside and outside the life assurance business, which arises in respect of the tax years in question and may have a bearing on the obligations of all commercial enterprises which received foreign income as part of their trades in those years. The right to relief derives from the provisions of double taxation treaties between the United Kingdom and the source countries or, in the absence of such treaty in any particular case, from "deemed" provisions of a treaty under section 790 of Part XVIII of the Income & Corporation Taxes Act 1988 ("ICTA"). I will refer to relief under a double taxation treaty ("DTT") as "treaty relief". I will refer to relief under section 790 as "unilateral relief". I will refer to double taxation relief whether resulting from treaty relief or unilateral relief as "DTR".
3. On this issue LGAS was successful and HMRC appeal.
4. The second issue is of interest only to life assurance companies and it concerns whether LGAS is entitled to credit the amount of foreign tax deducted at source in any year of assessment flowing from investments in foreign countries, held as part of the long-term insurance fund in respect of LGAS's pension business, against the corporation tax charged on LGAS's life assurance business generally in that year (as LGAS contends) or whether the credit for that tax is limited so that it can only be credited against the tax on such profit as was made in that year by LGAS's pension business forming part of that life assurance business (as HMRC contend). On this issue HMRC were successful and LGAS appeals. The Commissioners' decisions on issue 1 and issue 2 were the subject of the Interim Decision.
5. The third issue again concerns insurance companies only and was described by the Commissioners as depending "on the interpretation of section 82(1)(a) of the Finance Act 1989 as modified… It is whether in arriving at the pension business Schedule D Case VI profit in 1992 and 1993 [LGAS] is entitled to a deduction for foreign tax expended on behalf of holders of pension policies in respect of amounts for which it has secured" against corporation tax in respect of pension business profits in the year in question. LGAS contends that it was able to do so notwithstanding that the result was at least partial double relief in respect of the expenditure. HMRC contend that LGAS was not entitled to do so. On this issue HMRC were successful and LGAS appeals.
6. The issues relate to LGAS's returns for 1990 to 2000 inclusive in respect of which the years 1992 and 1993 were selected as representative of the issues that fell for determination by the Commissioners. The background facts from which the appeals result are set out by the Commissioners in paragraph 4 of the Interim Decision between sub-paragraphs (1) and (35) as follows:-

"Background information on LGAS

(1) Legal & General Assurance Society Limited ("LGAS") is a company registered in England and Wales. LGAS was incorporated on 1 April 1920 under company number 166055. Its authorised share capital is currently £1,000,000,000 divided into 1,000,000,000 ordinary shares of £1 each of which 201,430,403 have been issued and are fully paid.

(2) LGAS has carried on business as a composite insurance company since its incorporation and is authorised in the United Kingdom to conduct both long-term and general insurance business. For the years in issue in this appeal, LGAS was (and continues to be) engaged principally in life assurance and pensions business.

(3) LGAS is a wholly owned subsidiary of Legal and General Insurance Holdings Ltd which, in turn, is a wholly owned subsidiary of Legal & General Group Plc ("L&G Group Plc"). L&G Group Plc is the ultimate holding company of all companies in the Legal and General group ("The Group") and is a listed company, the activities of which encompass life assurance, general insurance, investment management and other financial services.

(4) Accounts for LGAS are prepared to 31 December each year.

The years under appeal

(5) The Tax Reference for LGAS is: 277/15005. The Tax District is: City D Large Business Office (LBO) CT. Tax computations and returns for LGAS have been submitted for all years to 2002. The Inland Revenue has agreed all tax computations for years prior to 1990.

(6) The Inland Revenue has issued estimated assessments for 1990 to 1998. Appeals have been lodged against these assessments on the basis that the assessments are estimated, may be excessive and that any profit or loss will be subject to group relief. For the years 1999-2001, the Inland Revenue has raised enquiries under Paragraph 24 (1) Schedule 18 Finance Act 1998.

(7) The matter in issue between the parties relates to all years under appeal and for 1999 and 2000 which are the subject of Inland Revenue enquiries. The 1992 and 1993 years have, however, been selected as representative of the issues that fall for the Commissioners' determination.

(8) Although in each year under appeal LGAS was carrying on a trade of insurance, in every year the Inland Revenue exercised the Crown's option to tax LGAS' life assurance business on what is commonly known as the "I minus E" basis. The Inland Revenue has always so assessed LGAS. The alternative calculation under the Crown option would be to tax all the profits of LGAS' life assurance business in a single Schedule D Case I computation.

(9) The categories of life business that LGAS conducts include basic life assurance (and general annuity) business ("BLAGAB") and pension business. Under the I minus E basis, BLAGAB is taxed by reference to the income and realised capital gains of the business less expenses. Pursuant to s436(1) ICTA 1988, the profits of its pension business are "treated as income within Schedule D, and ... chargeable under Case VI of that Schedule" and for that purpose, "the profits therefrom shall be computed in accordance with the provisions... applicable to Case I of Schedule D". Section 438 (2) ICTA 1988 requires pension business receipts to be taken into account in the Schedule D Case VI computation of profits or losses notwithstanding the exemption in section 438 (1) ICTA 1988 for the income and gains of investments referable to pension business. For convenience, the total of these amounts is identified as the 'aggregate I minus E' amount.

Information relating to the years 1992 and 1993

(10) For the years ended 31 December 1992 and 31 December 1993, LGAS wrote the following long term insurance business (as categorised by Schedule 1 to the Insurance Companies Act 1982):

Life and annuity business

Linked long term business

Permanent health business

Capital redemption business

Pension fund management business

Permanent health, capital redemption and pension fund management business do not constitute life assurance business.

(11) LGAS maintained (and continues to maintain) a long term insurance fund ("LTIF") in respect of its long term insurance business. The LTIF consists of -

internal linked investment funds for Basic Life Assurance Business,

internal linked investment funds for Pensions Business, and

non-linked investment funds in respect of the business categories.

(12) The internal linked investment funds (of both Basic Life Assurance Business and of Pension Business) are internal funds of assets which back LGAS's unit-linked life and pension policies respectively. The value of these policies is directly linked to the investment performance of the assets in the respective internal linked funds. This means that, all other things being equal, the receipt of income within the linked funds will result in a corresponding increase in the company's liability to holders of policies backed by the assets within these funds. The benefits to be provided under these policies are determined by reference to the value of these internal funds.

(13) The internal non-linked investment funds consist of assets which support long term business insurance policies whose benefits are not linked to the value of any internal fund. There is no direct correspondence between the receipt of any income within a non-linked fund and any increase in policyholder liabilities. Because of the different rules of taxation which attach to the different categories of long term business, it is necessary where there are non-linked funds to identify the income etc. referable to each category. Section 432A ICTA 1988 provides the basis for this allocation.

(14) In relation to this description of the internal linked funds and the internal non-linked funds, there is no distinction between the receipt of UK income and the receipt of foreign income.

(15) LGAS wrote both participating (with profits) and non-participating business. Participating business consists of policies or contracts under which the policyholders or annuitants are eligible to participate in surplus. Non-participating business consists of policies or contracts under which the policyholders or annuitants are not eligible to participate in surplus.

The treatment of foreign income

(16) LGAS's linked and non-linked funds held a number of investments in foreign shares and foreign government and corporate bonds. It received investment income from these investments in the form of dividends and interest.

(17) The bulk of the foreign income was received after the deduction of foreign withholding tax at source from the gross amount of the interest or dividend due. The foreign tax withheld was deducted at various rates, the amount of which depended on the country in which the foreign income arose.

(18) Appendices E to L [not reproduced] show the gross foreign investment income and the foreign tax deducted at source for the linked and non-linked funds for the years 1992 and 1993.

(19) For accounting purposes, the foreign investment income arising from the investments held by the internal linked funds was allocated directly to the particular funds (i.e. Basic Life Assurance or Pensions Business) for which the investment was held.

(20) Foreign investment income arising in respect of the non-linked business was apportioned between the categories of long term insurance business on the basis of the mean of the opening and closing liabilities for each category of business for the year in question (as per section 432A ICTA 1988).

Credit for foreign tax in 1992 and 1993

(21) Where there is a Double Taxation Convention between the UK and the country in which the foreign investment income arose, LGAS has claimed credit relief for double taxation against UK tax under the applicable Convention. LGAS has claimed tax credit relief for foreign tax at the rate of foreign withholding tax provided by the Convention. LGAS has claimed any foreign withholding tax deducted in excess of the Convention rate directly from the relevant overseas tax authorities.

(22) In those cases in which there was no Double Taxation Convention in force between the UK and the country in which the foreign investment income arose, LGAS has claimed unilateral relief under section 790 ICTA 1988. Relief has been claimed for the full amount of the foreign tax deducted from the gross amount of interest or dividends due.

(23) LGAS has also claimed as a deduction in respect of its pension business under section 82(1) Finance Act 1989, a proportion of the foreign tax related to that business for which credit was separately claimed against the corporation tax due on the aggregate I minus E amount.

(24) The following paragraphs describe more fully how LGAS has claimed credit for, and treated as an expense (part of), the foreign tax on its foreign investment income in its computations for 1992 and 1993.

(25) For the 1992 year, LGAS' profits chargeable to corporation tax (as shown in its most recent computations) were £12,373,200. For the 1993 year, the corresponding figure was £128,850,321.

(26) Special rates of corporation tax apply to the taxable profits of life insurance companies in accordance with sections 88 and 89 of the Finance Act 1989. Section 88(1) Finance Act 1989 provides that the policyholders' share, as defined in section 89(1) Finance Act 1989, of the I minus E profits is charged to corporation tax at the rate equal to the basic rate of income tax. The remainder of the I minus E profits is taxed at the normal UK corporation tax rate for the accounting period in question.

(27) In both 1992 and 1993, all the taxable profits in LGAS were taxed at the normal UK corporation tax rate of 33 per cent. Accordingly, in 1992 the corporation tax chargeable before double tax relief ("DTR") on chargeable profits after group relief was 33 per cent of £12,373,200, i.e. £4,083,156. In 1993, the corporation tax chargeable before DTR and the set-off of Advance Corporation Tax on chargeable profits after group relief was 33 per cent of £128,850,321, i.e. £42,520,619.

(28) Foreign withholding tax deducted at source from foreign investment income, less any tax recoverable from foreign tax authorities, and any underlying tax calculated in accordance with section 799 ICTA 1988, has been claimed as credit relief (double tax relief) in full against the total corporation tax chargeable on the aggregate I minus E amount after group relief.

(29) Accordingly, in 1992 the corporation tax of £4,083,156 has been fully offset by DTR to give nil net corporation tax chargeable. The foreign tax, for which DTR has been claimed in full, is analysed as follows

£

Linked Life funds 110,776

Linked Pensions funds 410,899

Non-linked fund 3,561,481

4,083,156

(30) An amount of £2,572,053 of this foreign tax has been taken into account separately as an expense in the Case VI computation of pension business profit.

(31) In 1993, DTR of £3,875,087 has been set off against the total corporation tax of £42,520,619. The foreign tax for which DTR has been claimed in full is analysed as follows

£

Linked Life funds 29,514

Linked Pensions funds. 519,441

Non-linked fund 3,326,132

3,875,087

(32) An amount of £2,615,054 of this foreign tax has been taken into account separately as an expense in the Case VI computation of pension business profit.

Deduction for foreign tax

(33) A deduction for a proportion of the foreign tax for which credit is claimed and referable to pension business as being expended on behalf of holders of pension policies has also been made in the Pension Business Schedule D Case VI computation in accordance with section 82(1) Finance Act 1989, as applied by section 436(3)(a) ICTA 1988.

(34) In 1992 the Pension Business Schedule D Case VI profit in the aggregate I minus E computation is nil. Foreign tax of £2,572,053 has been deducted as an expense in arriving at the Pension Business Schedule D Case VI profit under section 82(1). The £2,572,053 represents the policyholders' share of the sum of all the linked pensions foreign tax and the Pension Business proportion, as determined under section 432A ICTA 1988, of the non-linked foreign tax.

(35) In 1993, the Pension Business Schedule D Case VI profit in the aggregate I minus E computation is £19,768,612. Foreign tax of £2,615,054 has been deducted as an expense in arriving at that profit in accordance with section 82(1). The £2,615,054 represents the policyholders' share of the sum of all the linked pensions foreign tax and the Pension Business proportion, as determined under section 432A ICTA 1988, of the non-linked foreign tax."

Issue 1

The Relevant Statutory Provisions

7. The relevant legislation in force in 1992 and 1993 for the purpose of allowing credit against corporation tax for taxes deducted at source in foreign countries was contained in ICTA part XVIII. Chapter I of Part XVIII under the heading "the principal reliefs" provided so far as relevant as follows:-

"788(1) If Her Majesty by Order in Council declares that arrangements specified in the Order have been made with the government of any territory outside the United Kingdom with a view to affording relief from double taxation in relation to -

(b) corporation tax in respect of income or chargeable gains ...

and that it is expedient that those arrangements should have effect, then those arrangements shall have effect in accordance with subsection (3) below…

(3) Subject to the provisions of this Part, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to ... corporation tax insofar as they provide

(a) for relief ... from corporation tax in respect of income or chargeable gains;

(4) The provisions of Chapter II of this Part shall apply where arrangements which have effect by virtue of this section provide that tax payable under the laws of the territory concerned shall be allowed as a credit against tax payable in the United Kingdom."

8. Thus "arrangements", that is treaty provisions, conferring a right to DTR override inconsistent provisions in domestic UK tax legislation. The equivalent provisions conferring the right to "unilateral relief" are contained in section 790 which provided as follows:-

"790(1) To the extent appearing from the following provisions of this section, relief from ... corporation tax in respect of income and chargeable gains shall be given in respect of tax payable under the law of any territory outside the United Kingdom by allowing that tax as a credit against… corporation tax, notwithstanding that there are not for the time being in force any arrangements under section 788 providing for such relief.

(2) Relief under subsection (1) above is referred to in this Part as "unilateral relief".

(3) Unilateral relief shall be such relief as would fall to be given under Chapter II of this Part if arrangements with the government of the territory in question containing the provisions specified in subsections (4) to (10) below were in force by virtue of section 788, but subject to any particular provision made in respect to unilateral relief in that Chapter; and any expression in that Chapter which imports a reference to relief under arrangements for the time being having effect by virtue of that section shall be deemed to import also a reference to unilateral relief.

(4) Credit for tax paid under the law of the territory outside the United Kingdom and computed by reference to income arising or any chargeable gain accruing in that territory shall be allowed against any United Kingdom income tax or corporation tax computed by reference to that income or gain ...

(5) Subsection (4) above shall have effect subject to the following modifications that is to say -

(b) where arrangements with the government of the territory are for the time being in force by virtue of section 788, credit for tax paid under the law of the territory shall not be allowed by virtue of subsection (4) above in the case of any income or gains if any credit for that tax is allowable under those arrangements in respect of that income or those gains ......"

Sub-section (4) is the important provision for the purposes of this issue. During 1992 and 1993 LGAS received a relatively small amount of its foreign income from countries with which no "arrangements" had been made e.g. Hong Kong and Taiwan. It is accepted that, for the purposes of this judgment, there was no material difference between the legislative treatment of foreign income subject to treaty relief and that subject to unilateral relief.

9. Chapter II of Part XVIII is headed "Rules governing relief by way of credit". The material provisions of Chapter II were as follows:-

" 793(1)Subject to the provisions of this Chapter, where under any arrangements credit is to be allowed against any of the United Kingdom taxes chargeable in respect of any income or chargeable gain, the amount of the United Kingdom taxes so chargeable shall be reduced by the amount of the credit."

Section 795 which, having at sub-section (1) set out provisions for the computation of income subject to foreign tax which will be subject to United Kingdom income tax, provided at sub-section (2):-

"795(2) Where credit for foreign tax falls under any arrangements to be allowed in respect of any income or gain ... then, in computing the amount of the income or gain for the purposes of ... corporation tax -

(a) no deduction shall be made for foreign tax, whether in respect of the same or any other income or gain; and

(b) the amount of the income shall, in the case of a dividend, be treated as increased by any underlying tax which, under the arrangements, is to be taken into account in considering whether any and if so what credit is to be allowed in respect of the dividend."

and section 797 sub-sections (1) to (3) which provided:-

"797(1) The amount of the credit for foreign tax which under any arrangements is to be allowed against corporation tax in respect of any income or chargeable gain ("the relevant income or gain") shall not exceed the corporation tax attributable to the relevant income or gain, determined in accordance with subsections (2) and (3) below.

(2) Subject to subsection (3) below, the amount of corporation tax attributable to the relevant income or gain shall be treated as equal to such proportion of the amount of that income or gain as corresponds to the rate of corporation tax payable by the company (before any credit under this Part) on its income or chargeable gains for the accounting period in which the income arises or the gain accrues ("the relevant accounting period").

(3) Where in the relevant accounting period there is any deduction to be made for charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of more than one description

(a) the company may for the purposes of this section allocate the deduction in such amounts and to such of its profits for that period as it thinks fit; and

(b) the amount of the relevant income or gain shall be treated for the purposes of subsection (2) above as reduced or, as the case may be, extinguished by so much (if any) of the deduction as is allocated to it."

10. Section 793 established that the foreign tax is to be set against UK tax and restricts credit for such tax to tax made creditable under the provisions of the relevant treaty. Section 795(2) provided that for UK corporation tax purposes the relevant foreign income was that income gross of any foreign tax deducted at source. Thus relief by way of deduction of foreign tax from the income subject to corporation tax is not to be given in addition to the credit for the foreign tax against the computed corporation tax on the taxpayer's total income. Section 797 imposed an upper limit on the amount of foreign tax to be credited against such corporation tax. That limit is to be the UK measure of corporation tax due on the relevant foreign income grossed up by the foreign tax. Thus where the tax deducted at source was at a rate greater than UK corporation tax no credit was to be given for any excess.
11. Section 798 contained complex provisions for DTR in respect of income resulting from interest on loans made to a person resident outside the UK. These are to be contrasted with the relatively simple provisions of section 793, 795 and 797 in respect of income derived from other sources in particular foreign investment income.
12. Under the heading "Deduction for foreign tax where no credit allowable", Section 811 provides:-

"(1) For the purposes of the Tax Acts, the amount of any income arising in any place outside the United Kingdom shall, subject to sub-section (2) below, be treated as reduced by any sum which has been paid in respect of tax on that income in the place where the income has arisen (that is to say, tax payable under the law of a territory outside the United Kingdom)."

13. Sub-section (2) made the section expressly subject to section 795(2). Accordingly no deduction for foreign tax could be made under section 811(1) where credit for the foreign tax fell to be allowed under any "arrangements" or by virtue of section 790. Thus "credit relief" and "relief by way of deduction" are alternatives and the latter is not available where the former is claimed.
14. Section 432(1) of ICTA under the heading "separation of different classes of business" provided:-

"432(1) Where an insurance company carries on life assurance business in conjunction with insurance business of any other class, the life assurance business shall, for the purposes of the Corporation Tax Acts, be treated as a separate business from any other class of business carried on by the company."

15. Issue 1 concerns the extent to which LGAS was entitled to credit foreign tax against corporation tax otherwise payable in respect of its pension business.
16. Section 75 of ICTA provided:-

"75(1)  In computing for the purposes of corporation tax the total profits for any accounting period of an investment company resident in the United Kingdom there shall be deducted any sums disbursed as expenses of management (including commissions) for that period, except any such expenses as are deductible in computing profits apart from this section…."

Section 76 under the heading "expenses of management: insurance companies" provided:-

"76 (1)  Subject to the provisions of this section and of section 432, section 75 shall apply for computing the profits of a company carrying on life assurance business, whether mutual or proprietary, (and not charged to corporation tax in respect of it under Case I of Schedule D), whether or not the company is resident in the United Kingdom, as that section applies in relation to an investment company except that—

(d) the amount treated as expenses of management shall not include any amount in respect of expenses referable to pension business; …

 (2)  Relief in respect of management expenses shall not be given to any such company, whether under section 242 or subsection (1) above, so far as it would, if given in addition to all other reliefs to which the company is entitled, reduce the corporation tax borne by the company on the income and gains of its life assurance business for any accounting period to less than would have been paid if the company had been charged to tax in respect of that business under Case I of Schedule D…."

17. Each DTT is a separate international agreement, the product of separate negotiations between two Sovereign States. In practice the vast majority of such treaties made by the UK follow a standard form of which the treaty with France is typical. The fundamental provision of the French treaty is Article 24 which provides:-

"Double taxation of income shall be avoided as follows:

Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof):

French tax payable under the laws of France and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within France… shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the French tax is computed…. "

The term "United Kingdom tax" is defined in Article 1(1) (a) and includes corporation tax. I will refer to the French treaty as "the sample treaty".

The Rival Contentions

18. It is common ground that there are two methods by which the profits of a life assurance company can be taxed. The first is under Case I of Schedule D of ICTA, the second on the I minus E basis where I is income and chargeable gains and E is expenses. The system for taxation of life assurance companies is described in the judgment of Robert Walker J, at first instance, in Johnson v Prudential Assurance (1996) 70 TC 445 between pages 463 and 465. It is accepted that the Revenue have the choice of which method of taxation to employ and almost invariably employ the I minus E method because that yields the most tax. For the purposes of this judgment it matters not which of the two methods was employed in the relevant years to tax the life assurance profits of LGAS. Either method would have resulted in a computation of corporation tax payable by LGAS in respect of its life assurance business in the relevant years. I have drawn attention, however, to the alternatives because of the general application of issue 1 to which I have already referred. The resolution of this issue will affect companies in other areas of business than life assurance which are taxed under Case I of Schedule D.
19. The only relevant UK tax is corporation tax which is charged on the "profits of companies" defined as meaning "income and chargeable gains": see section 6(1) of ICTA. For the purposes of corporation tax income is computed in accordance with income tax principles and is assessed under the same Schedules and Cases as apply for income tax purposes: section 9(1) and (3). The amounts so computed are then aggregated with the company's chargeable gains to arrive at the total profits: section 9(3). Reliefs may be allowed at various stages in this process: see per Peter Gibson LJ in Commercial Union Assurance v Shaw (1998) 72 TC 101 at 126 D/I. The latest stage at which relief can operate is by reducing or extinguishing the tax which would otherwise be payable. As already pointed out DTR can be given by two alternative methods, the first, by allowing foreign tax as a deduction from foreign income at an early stage in the corporation tax computation (i.e.. section 811), the second, by the credit of foreign tax against UK corporation tax (section 793(1)) which takes place at the last stage. The latter method is the more beneficial to the taxpayer.
20. At paragraphs 18 and 19 of his written submissions Mr Henderson, who appeared for the Revenue, succinctly summarises the problem raised by issue 1 as follows:-

"18 The basic problem is whether any (and if so what) limit is imposed on the amount of credit relief which may be obtained, in cases where income which is taxed abroad on its gross amount is not taxed on the same (or a comparable) basis in the UK, but is instead treated as a receipt which enters into a computation of taxable income on some quite different basis, such a computation of trading income under Case I of Schedule D.

19 A computation of trading income under Case I of Schedule D will involve the deduction of items of allowable expenditure etc from the gross receipts in order to arrive at the net amount of taxable income or profit, if any (obviously the amount will be nil if the deductions match the receipts and a loss if they exceed them). Where the receipts include foreign income which has borne foreign tax (usually by deduction at source), the question in broad terms is whether the UK taxpayer is allowed credit relief for the whole of that tax (subject only to section 797) against the whole of the CT on his Case I income, or whether he is allowed credit only against so much of the CT on his Case I income as is attributable to the foreign income. Legal & General argues for the former of these approaches, the Revenue for the latter."

21. At paragraph 2 of their Interim Decision the Commissioners set out an example by reference to which they then illustrate the contentions of the parties as follows:-

Foreign Case I receipt (per foreign tax system) 100.00

Foreign withholding tax (20. 00)

Post-foreign tax Case I receipt 80.00

Foreign Case I receipt (per UK tax system) 80.00

Foreign tax credit that falls to be allowed 20.00

Foreign Case I receipt entering computation (s.795 (2)) 100.00

UK Case I receipts 4,900.00

Foreign Case I receipts 100.00

Total gross income chargeable under Case I 5,000.00

Deductions 4,500.00

Case I profit 500.00

UK tax at 33% (165.00)

Post-tax profit 335.00

It is Mr Henderson's submission that on the example of the Commissioners 3.3 of foreign tax is available for credit against the corporation tax otherwise payable on the Case I profit of 500. This is because the foreign income of 100, after accounting for expenses, yields a profit of 10 on which the corporation tax is 3.3. This is the result of HMRC's case that Article 24 of the sample treaty is to be construed as requiring there to be calculated what percentage of the overall profit of LGAS' pension business was referable to the foreign income so that the foreign tax paid by LGAS can only be credited to the extent that the tax on that referable profit is available to have the foreign tax credited against it. Since on the example the foreign tax is 20 it will readily be seen that this result means that a large percentage of the foreign tax paid by LGAS will not be relieved.

22. It is Mr Gammie's contention that because the corporation tax on the UK tax on the overall profit of the company on the example exceeds 20, (the amount of the foreign tax deducted at source), the only restriction on the amount of foreign tax available for credit is that contained in section 797. On the example, tax of 20 is less than the UK corporation tax on the gross foreign income and thus section 797 does not reduce the foreign tax available for credit which can all be credited against the overall corporation tax otherwise payable. The effect of this solution is to permit a substantial amount of foreign tax to be credited against tax referable to United Kingdom or other sourced income of LGAS.

HMRC's submissions

23. It is the submission of the Revenue, the appellant on this issue, that the decision of issue 1 turns on the construction of Article 24 of the sample treaty, and of section 790(4). It is not suggested by either side that those two provisions are to be construed as having a different effect. I will therefore confine my analysis to the sample treaty provisions. It is submitted by the Revenue, and LGAS accepts, that these provisions must be given a "purposive" construction. There is no dispute about the amount or nature of the potentially creditable foreign tax under any of the treaties. LGAS is therefore entitled to be "allowed" a credit for the foreign tax "against any United Kingdom tax computed by reference to the same … income… by reference to which the [foreign] tax is computed".
24. It is submitted by the Revenue that these words are to be construed as imposing a restriction on the credit available to LGAS, by restricting the amount of the overall corporation tax against which any foreign tax can be credited, to the tax chargeable on that proportion of LGAS' overall profits on its pension business, in the relevant year of account, which the foreign income grossed up bore to LGAS' overall pension business income. Thus, on the example, only 10 of the Case I profits of 500 would represent the foreign income upon which corporation tax of 3.3 would be chargeable with the result that, as I have already described, LGAS would not obtain any DTR for 16.7 of the foreign tax which it had paid.
25. It is submitted that the corporation tax against which credit is to be allowed under the sample treaty provision is not the corporation tax on the aggregate profits ascertained in accordance with section 9(3), even though the charge to corporation tax is a single unitary charge on the profits of any company and that aggregate is the amount so chargeable subject only to reliefs which operate at the last stage of its computation. It is submitted that the Revenue's construction of the sample treaty provision is supported by the judgment of Mr Justice Hoffmann in George Wimpey International Ltd v Rolfe (1989) 62 TC 597.
26. In the Wimpey case Mr Justice Hoffmann was considering a claim to DTR in respect of a company conducting a worldwide construction business on which, in the relevant year of assessment, it had made a loss. In the same year, however, it had made non-trading profits resulting in an overall profit upon which corporation tax was chargeable. The company's trading operations in three foreign countries, in the relevant year, did produce profits which reduced the company's overall trading loss but on which tax was deducted in those countries. The company sought to deduct from its overall corporation tax, the tax that it had paid at source on its three profitable trading operations. The Special Commissioners dismissed the company's appeal from the Revenue's rejection of the company's claim to credit for this foreign tax in the computation of the company's overall liability for corporation tax. Mr Justice Hoffmann dismissed the company's appeal from the decision of the Special Commissioners. Because the foreign tax for which credit was sought was sourced in countries which were not party to a DTT with the UK the claim for credit had been made under the then equivalent of section 790(4). At page 605 of the report Mr Justice Hoffmann is reported as saying this:-

"The issue is whether there is United Kingdom corporation tax computed by reference to the same income against which the foreign tax can be allowed. Likewise, for the purpose of applying the Chapter II rules the question is whether, for the purposes of s 501(1), there is United Kingdom tax 'chargeable in respect of' the same income.

 The [taxpayer company] says that its liability to corporation tax was 'computed by reference to income arising' in the three territories. If that income had not entered into the computation, its trading loss would have been larger and its profit for the purposes of corporation tax would have been smaller. Consequently, the corporation tax should be regarded as 'computed by reference to' and 'chargeable in respect of' the foreign income. The Crown, on the other hand, says that the computation to which s 498(3) [790(4)] refers is that of liability charged upon the income which has been taxed in the foreign territory. That computation, under Case I of Sch D, produced no liability to United Kingdom tax. There was no tax chargeable, therefore, in respect of that income. The fact that by virtue of s 177(2), which allows the company to set off a trading loss against profits of any description, and s 250(3), providing for aggregation, the trading results in the foreign territory would have an indirect effect on the company's liability for tax in respect of its non-trading United Kingdom income is, in the Crown's view, irrelevant. The Crown submits that there is no injustice about this because the [taxpayer company] is entitled under s 516 [811] to treat the trading loss as increased by the amount of the foreign tax.

 A basic principle of United Kingdom income tax law is that tax is charged by reference to various kinds of income identified according to their source under the Schedules and Cases of the Act. Each Case has its charging provisions which identify the income to be taxed together with ancillary provisions in accordance with which that income is to be computed. When s 501 speaks of United Kingdom tax chargeable 'in respect of any income' it therefore means, in relation to income tax, the tax chargeable by virtue of one or other of the Cases in the Schedules. Each Case gives rise to a separate computation of income and consequently of tax. If, therefore, the appellant had been an individual liable to income tax I do not think it could have been said that any United Kingdom tax in respect of which he was chargeable had been computed by reference to income which arose in the foreign territory. The only computation into which that income would have entered would have been for the purposes of Case I of Sch D, and which produced no liability to tax. Nor could any tax be said to have been charged 'in respect of' that income.

Does it make any difference that the appellant is a company chargeable to corporation tax on its total profits calculated in accordance with, among other things, s 177(2) and s 250(3)? I do not think that it does. Income for the purposes of corporation tax is computed according to income tax principles under the same Schedules and Cases. It would therefore be very odd if a company was entitled to double taxation relief denied to an individual. In my view double taxation relief is intended to ensure that the taxpayer does not suffer tax twice charged on the same income. In Ostime v Australian Mutual Provident Society [1960] AC 459 at 480, Lord Radcliffe, speaking in general terms of bilateral double taxation treaties, said: 'The aim is to provide by treaty for the tax claims of two governments both legitimately interested in taxing a particular source of income…. It assumes one will have identified the income in respect of which United Kingdom tax is being imposed, and that this income will be the same as the income arising in the foreign territory in respect of which the credit is to be allowed. As the Special Commissioner said, there is evidence throughout the scheme of this legislation of 'the necessity … of exactly identifying the fund charged to overseas tax with a fund chargeable also to UK tax'.

 The reference in s 498(3) [790(4)] to United Kingdom tax being 'computed by reference to' the income on which the foreign tax has been computed was introduced by the Finance Act 1967 in consequence of the decision in Duckering (Inspector of Taxes) v Gollan [1965] 1 WLR 680, 42 TC 333, and was intended to ensure that the identity was not between funds which might notionally be regarded as the taxable income in the foreign territory and the United Kingdom but between the actual funds by reference to which the computation of tax was made. This identification of the income subject to United Kingdom corporation tax can, in my judgment, only be made in accordance with income tax principles. On this basis it seems to me that the income in respect of which the taxpayer company became liable to corporation tax was its non-trading income notwithstanding that the computation of that income was made subject to deduction for losses which took into account the company's trading in the three territories. The taxpayer company was not chargeable to any tax in respect of the income which had been subject to foreign tax. No credit can therefore be allowed, and the appeal must be dismissed."

27. Mr Justice Hoffmann did not have to deal, and did not deal, with the issue in the present case because he was able to find that, because corporation tax was to be computed on a Schedular basis, and the foreign tax was incurred in the company's trading in which the company had made a loss, there was no corporation tax in respect of the company's trading operations against which that tax could be credited.
28. In his written submissions Mr Henderson summarised the importance of the Wimpey case for that being advanced by the Revenue as follows:-

"(a) establishing the proposition that, for the purposes of credit relief, it is necessary to break down the aggregate CT charge into component parts;

(b) the Judge's statement of the purpose of double taxation relief at 606B as being "to ensure that the taxpayer does not suffer tax twice charged upon the same income";

(c) his endorsement at 606E of the Special Commissioner's stress on "the necessity…of exactly identifying the fund charged to overseas tax with a fund chargeable also to UK tax"; and

(d) his explanation of the words "computed by reference to" in what is now section 790(4), and therefore by extension in the common form Treaty provision, as being to ensure that the identity was "between the actual funds by reference to which the computation of tax was made" (606F-G). "

29. It is accepted that under the sample treaty the actual fund by reference to which the computation of the creditable foreign tax has to be made is the income received from abroad grossed up by the amount of the tax deducted at source i.e. on the example 100. Mr Henderson submits that the result is that the fund chargeable to corporation tax in the UK, which is exactly identifiable with that foreign income, is not the whole of the company's computed profits subject to corporation tax but rather so much of those profits as is referable or attributable, on a computation on Case I of Schedule D principles, to that foreign income. Mr Henderson submits that the way to arrive at the appropriate figure is by what he describes as "a mini Case I" computation, but he also accepts that, since the legislation does not provide for a method of computation, there may be alternatives which are capable of throwing up a different figure. He submits that it is the corporation tax chargeable on this figure and not the corporation tax chargeable on LGAS' pension business profit as a whole, which, as a matter of construction of the treaty, is the UK tax "computed by reference to the same … income as the French taxable income".
30. Mr Henderson submits that this construction does not strain the language of the treaty and is the only one which ensures a true identity between the funds of taxable income sourced in the foreign country and a taxable fund in the United Kingdom. He criticises LGAS' construction as one which leads to the anomalous result that a UK taxpayer is given credit against UK tax which is attributable, not to the relevant foreign income, but to other unrelated receipts. The anomaly, he submits, is compounded by the fact that the smaller the amount of the UK tax which is attributable to the foreign income, the more widely the credit relief is spread to the unrelated receipts. He submits that this goes far beyond the objective of ensuring that the taxpayer does not suffer tax twice on the same income and is not an intention that can be imputed to the negotiators of the treaties or to Parliament in giving those treaties legal effect and providing provisions of a deemed treaty where no such treaty has been negotiated.
31. Mr Henderson submits that his construction of the sample treaty is supported by the following considerations:-

i) His construction of the treaty would make its effects consistent with Model Article 23B of the OECD Model Convention on double taxation even though the wording of the two provisions is different. Article 23 B under the heading "credit method" provides as follows:-

"(1) Where a resident of a Contracting State derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first mentioned State shall allow:

(a) as a deduction from the tax on the income of that resident, an amount equal to the income tax paid in that other State;

(b) as a deduction from the tax on the capital of that resident, an amount equal to the capital tax paid in that other State.

Such deduction in either case shall not, however, exceed that part of the income or capital tax, as computed before the deduction is given, which is attributable, as the case may be, to the income tax or the capital which may be taxed in the other State.

(2)…"

It is accepted that the provisions of Article 23 B are more apt to achieve the effect for which the Revenue contend in respect of Article 24 of the sample treaty. Putting the Model Article into effect would, therefore, require the same sort of computation as Mr Henderson suggests is necessary to give effect to Article 24. So far as relevant the Official Commentary on model Article 23 B is contained in paragraphs 42, 43 and 62 as follows:-

"42. A comparison of the laws and practices of the OECD Member countries shows that the amount to be exempted varies considerably from country to country. The solution adopted by a State will depend on the policy followed by that State and its tax structure. It may be the intention of a State that its residents always enjoy the full benefit of their personal and family allowances and other deductions. In other States these tax free amounts are apportioned. In many States personal or family allowances form part of the progressive scale, are granted as a deduction from tax, or are even unknown, the family status being taken into account by separate tax scales.

43. In view of the wide variety of fiscal policies and techniques in the different States regarding the determination of tax, especially deductions, allowances and similar benefits, it is preferable not to propose an express and uniform solution in the Convention, but to leave each State free to apply its own legislation and technique. Contracting States which prefer to have special problems solved in their convention are, of course, free to do so in bilateral negotiations. Finally, attention is drawn to the fact that the problem is also of importance for States applying the credit method (cf. paragraph 62 below).

62. According to the provisions of the second sentence of paragraph 1 of Article 23B, etc the deduction which the State of residence (R) is to allow is restricted to that part of the income tax which is appropriate to the income derived from the State S, or E (so-called "maximum deduction"). Such maximum deduction may be computed either by apportioning the total tax on total income according to the ratio between the income for which credit is to be given and the total income, or by applying the tax rate for total income to the income for which credit is to be given. In fact, in cases where the tax in State E (or S) equals or exceeds the appropriate tax of State R, the credit method will have the same effect as the exemption method with progression. Also under the credit method, similar problems as regards the amount of income, tax rate, etc. may arise as are mentioned in the Commentary on Article 23 A (cf. especially paragraphs 39 to 41 and 44 above). For the same reasons mentioned in paragraphs 42 and 43 above, it is preferable also for the credit method not to propose an express and uniform solution in the Convention, but to leave each State free to apply its own legislation and technique. This is also true for some further problems which are dealt with below."

ii) It is not an objection that no express statutory machinery is provided for the calculation involved in the Revenue's construction. It is open to the Revenue to provide its own (the mini Case I computation) which a taxpayer may agree or in default of agreement may be arrived at by recourse to the Commissioners or the courts.

iii) The decision of the Special Commissioner, in putting into effect the provisions of section 790(4) in the case of Yates v GCA International Ltd (1991) 64 TC 37, adopted the construction contended for by the Revenue and is authority for that construction. It is accepted that the two main issues in that case, ultimately disposed of by Mr Justice Scott on appeal from the Special Commissioner, do not have a bearing on issue 1. It is also accepted that the third subsidiary question which the Special Commissioner dealt with alone, which involved his calculation of the amount of foreign tax which could be credited against UK tax, resulted in a figure which is only consistent with his adoption of a construction of similar provisions to the sample treaty provisions, consistent with the Revenue's construction put forward in this court.

iv) Such a construction is consistent with the restriction on creditability of foreign tax contained in section 797 provided that "the relevant income or gain" in section 797(1) is construed as meaning the profit resulting from Mr Henderson's' proposed mini Case I computation of the profit resulting from the foreign income grossed up by the foreign tax deducted at source.

v) LGAS' construction is inconsistent with the taxpayer's ability, under section 797(3), to allocate certain deductions to different categories of UK taxable income.

32. I have come to the conclusion that I cannot accept the Revenue's submissions. I have arrived at that conclusion for the following reasons:-

Construing the words of the sample treaty

i) Article 24 of the sample treaty is incorporated into English law by section 788 which is the first section in Chapter I of Part XVIII of ICTA. That chapter is headed "the principal reliefs". The demonstrable purpose of section 788 and the remainder of Chapter I is, first, to give effect under United Kingdom law to any DTT in respect of which an appropriate Order in Council has been made within sub-section (1), secondly, to identify the creditable foreign tax, and thirdly, to define the means of relief as a process of setting foreign tax against appropriate United Kingdom tax. Sub-sections (4) and (6) of section 788 direct the reader to Chapter II of Part XVII where the reader is concerned with the application under English law of the DTR arising under any relevant DTT. Chapter II is headed "Rules governing relief by way of credit" and there then follow provisions as to how DTR is obtainable in an appropriate case under the United Kingdom taxation system. Although it is certainly not impossible that a DTT, using appropriate words, or section 790, creating unilateral relief, might contain provisions operating to restrict the relief obtainable, Chapter I of Part XVIII and the DTTs are unlikely places to find such a provision. The provisions of Article 24 of the sample treaty are, by its first sentence, expressly made "subject to the provisions of the law of the United Kingdom regarding the allowance as credit against United Kingdom tax of tax payable in a territory outside the United Kingdom…."

ii) It is the next sentence of Article 24 which is crucial: "French tax payable under the laws of France and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within France (excluding in the case of a dividend, tax payable in respect of profits out of which the dividend is paid) shall be allowed as a credit…." Thus far the sentence indicates no intended limitation of the amount of the French tax which is to be creditable. There then follow the crucial words "shall be allowed as a credit against any [not "the"] United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the French tax is computed;…." It is therefore, again, not to be expected that in the concluding words of this sentence there is to be found a restriction on the amount of creditable foreign tax.

iii) I accept that the final words of the sentence which I have set out above are capable of being construed in the manner for which the Revenue contend. However it seems to me that they are at least as apt to be construed in the sense contended for by LGAS, namely, as establishing that the foreign income or gain on which the foreign tax arose must enter into the computation of the UK tax against which credit for the foreign tax is claimed. Construed in this way the second sentence of the Article does not purport to impose a detailed restriction on the creditability of foreign tax but simply requires a connection between the source of that foreign tax and the United Kingdom tax against which it is to be credited such that the former should be part of the computation of the latter. This is particularly so when one remembers that Chapter II of Part XVIII contains section 797 the purpose of which, as its heading confirms, is to limit the amount of the credit obtainable which would not operate if the former construction were correct.

iv) I do not accept that the Wimpey case supports the Revenue's construction. In the first full paragraph of the extract from the judgment of Mr Justice Hoffmann in that case, which I have quoted above, the judge was concerned to deal with a submission by a taxpayer as to the applicability of the provisions of the predecessor of section 790(4) to the foreign tax on the income from the three profitable operations in the year in question and against what United Kingdom corporation tax that tax might be credited. He accepted that, if there had been any, the appropriate UK tax against which credit could be taken was such tax as would have followed from the computation under Case I Schedule D of any profit flowing from the company's trading operations as a whole. The point is underlined in the next paragraph where he was looking at the application of the provisions to income tax upon an individual. He was considering the words in the predecessor section to section 790(4) "in respect of any income" when used in the sentence "credit is to be allowed against any of the United Kingdom taxes chargeable in respect of any income…". Having pointed out that it is a basic principle of United Kingdom income tax law "that tax is charged by reference to various kinds of income identified according to their source under the Schedules and Cases of the Act" he goes on "when section 501 speaks of United Kingdom tax chargeable "in respect of any income" it therefore means, in relation to income tax, the tax chargeable by virtue of one or other of the Cases in the Schedules." He goes on to conclude that the fact that the taxpayer appellant was a company made no difference to this principle.

In the final paragraph of his judgment Mr Justice Hoffmann deals with the predecessor of another part of section 790 namely the words "computed by reference to" when used in the commencing words of sub-section (4) namely "credit for tax paid under the law of the territory outside the United Kingdom and computed by reference to income arising or any chargeable gain accruing in that territory". Mr Justice Hoffmann says "the reference in section 498(3) [790(4)] to United Kingdom tax being "computed by reference to" the income on which the foreign tax has been computed… was intended to ensure that the identity was not between funds which notionally might be regarded as the taxable income in the foreign territory and the United Kingdom, but between the actual funds by reference to which the computation of tax was made." I do not see anything in these passages and the passage where he points to the Special Commissioner having correctly drawn attention to evidence throughout the scheme of the legislation of "the necessity… of exactly identifying the fund charged to overseas tax with a fund chargeable to UK tax", inconsistent with the submissions of LGAS or leading to the conclusion that section 790(4) contemplates a mini Case I calculation of the tax referable to an assessed portion of the overall pension business profit of the company. Rather it seems to me they support LGAS' case that the computation spoken of in the words of the sample treaty "computed by reference to the same…income…by reference to which the French tax is computed…" refers to the actual I minus E computation of the corporation tax chargeable on the income from LGAS' pension business in the relevant years.

I do not wish to leave the Wimpey case without drawing attention to Mr Justice Hoffmann's definition of the purpose of double taxation relief where he says in the penultimate paragraph of his judgment "in my view double taxation relief is intended to ensure that the taxpayer does not suffer tax twice charged upon the same income."

v) In Collard v Mining and Industrial Holdings Ltd 62 TC 448 at page 489 Lord Oliver, in summarising "shortly the philosophy behind" the predecessor provisions of Part XVIII of ICTA where there is a DTT, said this:-

"where a double taxation convention exists and applies, foreign tax suffered on dividends paid to a United Kingdom resident company is to be added back for the purpose of ascertaining that company's gross income for the purpose of U.K. corporation tax. The corporation tax is then ascertained on the grossed-up income so produced and the foreign tax is then credited up to a ceiling of the amount of that corporation tax for the purpose of ascertaining the company's liability to corporation tax. Thus the foreign tax credit may result in there being no liability for corporation tax at all on the relevant income (where, for instance, the foreign tax suffered is at a rate equal to or greater than the rate of corporation tax) but it can never exceed the amount of corporation tax which would be payable had there been no such credit. There can therefore be no question of any repayment to the taxpayer of foreign tax suffered."

I accept Mr Gammie's submission that there is no suggestion here of any of the restrictions contended for by the Revenue, on the contrary it is clear that the foreign tax is "subject to the limits referred to" to be credited against the corporation tax on all of the company's income (both domestic and foreign) without any further abatement of that credit.)

vi) Dealing with the specific points for which Mr Henderson claims the Wimpey case is authority:-

(a) It seems to me that Mr Justice Hoffmann is pointing to the necessity of breaking down the aggregate corporation tax charge into its component parts in the context of the case before him where it was necessary to distinguish the loss making trading operations for which, under ICTA a separate Schedule D Case I computation was required, from the non-trading profits which were separately taxable.

(b) I read Mr Justice Hoffmann's statement of the purpose of double taxation relief as being of assistance to LGAS in justifying their contention that they can credit foreign income tax paid against corporation tax on aggregated UK income.

(c) and (d) I have already dealt with these points above.

vii) The use of the word "any" in the phrase "any United Kingdom tax computed by reference to the same… income …by reference to which the French tax is computed." It seems to me that the natural meaning of this phrase is that it refers to any UK corporation tax arising from a computation of UK tax into which the foreign income enters as one part or one element and which thereby was calculated, inter alia, by reference to that foreign income.

viii) I accept Mr Gammie's overall submission on the wording of the sample treaty provision and section 790(4) that it is a very circuitous and obscure way for a draftsman who intended to realise the result contended for by the Revenue, to choose to achieve that result. Article 23B of the OECD Model Convention is an example of how the Revenue's result might have been achieved.

Supporting considerations

33. I turn to Mr Henderson's supporting considerations and first to his submission that his construction is supported by the fact that it would bring the effect of the sample treaty into line with Article 23B. It is not said that the sample treaty or any of the UK DTTs were based on the OECD model form. It could not be so said because it is accepted that the language of the sample treaty provision pre-dates the initial adoption of the OECD model treaty in 1963. The words used by model Article 23B are substantially different from those of the sample treaty Article 24 and, in my judgment, have a different effect.
34. In agreement with Mr Gammie's submissions in my judgment it is a weakness in the Revenue's case for the construction of Article 24 that nowhere in the treaty or in Chapter II of Part XVIII ICTA is to be found any express provision for a mini Case I calculation of corporation tax referable to the proportion of the overall profits of the taxpayer derived from the foreign income. In the Collard case the courts were considering, amongst other things, the effect of a section of taxing legislation which conferred a power on a taxpayer at his discretion to allocate advance corporation tax paid amongst its overall outstanding tax in order to reduce such tax. The taxpayer had failed to make any such allocation. It was the Revenue's case on the construction of the relevant provision that a pro-rata allocation of advance corporation tax was to be implied in the absence of any allocation by the taxpayer. At page 478 of his judgment in the Court of Appeal Lord Justice Nicholls says this:-

"The legislation contains no express provision regarding the allocation of advance corporation tax for the purposes of s 505 if the taxpayer makes no allocation under s 100(6). Had the draftsman understood, and had Parliament intended, that in such a case there was to be a pro rata allocation, as contended by the Crown, surely express provision would have been made to that effect. We find it inconceivable that such a result can have been intentionally left to be implied in a taxing statute."

35. Here it is a necessary part of the Revenue's submissions that a computation of the corporation tax referable to the profit derived from the foreign income takes place. There is nowhere any express provision for that to happen. It follows that such a requirement must be implied into the provisions as so construed and the correct method of computation must follow, by implication, from the object to which it is said that the computation is addressed. However the Revenue accept that there are a number of ways in which this computation could be conducted, throwing up different results. They maintain that the appropriate method is to follow Schedule D Case I principles. If that were not accepted by LGAS, the Commissioners or a court would have to determine the correct basis of the computation necessarily to be implied by the Revenue's construction of the provisions.
36. I have set out above extracts from the official commentary on the OECD model form. It is clear from those extracts that the writer would expect detailed national statutory provisions as to how effect should be given in individual countries to Article 23B which, as I have already said, requires such a calculation as is suggested by the Mr Henderson.
37. In my judgment in so far as the Commissioners were prepared to overlook this weakness in the Revenue's case they were in error.
38. I turn to consider the reliance placed by the Revenue on the decision of the Special Commissioner in the Yates case. I have had the benefit of reading an article written by Professor Philip Baker QC in October 1998 entitled "Some aspects of United Kingdom Double Taxation relief". In that article he examines the decision of the Special Commissioner at some length and he appears to have had access to information about the case which is not available from the report. It is undoubtedly correct that the decision of the Special Commissioner was consistent with the Revenue's submissions before me. It is apparent from his article that Professor Baker was not prepared to attach much weight to the authority of this decision. I do not wish to appear in any way disrespectful of the decision of the Special Commissioner in the Yates case. I will confine myself to saying that in the absence of any record of the process of reasoning relied upon by the Special Commissioner in arriving at this conclusion, it is impossible for me to attach much weight to it.
39. Section 797 is, by common consent, a difficult section to construe. In order for it to be construed consistently with the Revenue's case, "the relevant income or gain", as used in the sub-sections of that section, must be construed as meaning the income or gain thrown up by the proposed "mini Case I computation", in the example 10. In agreement with the submissions of Mr Gammie I am unable to accept this construction of section 797. It involves putting a different meaning on the same words used in section 793 "any income or chargeable gain" and 795(2), "where credit for foreign tax falls…to be allowed in respect of taxes chargeable in respect of any income or gain". It is clear that that phrase when used in section 795(2) must mean the income computed for the purposes of foreign tax grossed up under paragraphs (a) and (b) by the amount of foreign tax or underlying foreign tax. It seems to me that section 797 is to be construed as placing a ceiling on the credit for foreign tax obtainable by a taxpayer which equates to the United Kingdom corporation tax, at the appropriate rate, (here 33%), chargeable on the income received from abroad grossed up by any tax deducted at source or underlying tax which it suffered at source. Sub-section (3) confers on the taxpayer a power to allocate expenses deductible under UK tax law between income derived from domestic and foreign sources. If allocated to income derived from a foreign source this will operate to reduce that income and thus the creditable foreign tax. Since it will usually be to the taxpayer's disadvantage to reduce the amount of creditable foreign tax, the taxpayer will be unlikely to do this but the taxpayer has the option.
40. It is convenient at this point to insert a submission of Mr Gammie which is not a reaction to the Revenue's case. I accept Mr Gammie's submission that the presence in Chapter II of section 798 is significant because it creates a special regime to deal with foreign income comprising interest received by a taxpayer from loans made to foreign residents on the basis that LGAS's submissions on construction are correct: see also the view of Professor Baker at page 453 of his article. The same point can be made in relation to the new section 804C inserted in Chapter II by the Finance Act 2000.
41. It was Mr Henderson's overall submission that the construction of Article 24 of the sample treaty and of section 790(4), advanced on behalf of LGAS, was implausible because it threw up a result which he submitted the negotiators of the treaties and Parliament cannot have intended. He submitted that they cannot have intended that taxpayers, such as LGAS, with foreign income, should be at liberty to credit foreign tax deducted at source on that income, not only against the tax falling due as a result of the profit to the taxpayer flowing from that income, but also against the profit from UK or other sourced income, if the tax on the former profit was insufficient to allow full relief. He submitted that it was implausible that they intended a result which meant that the smaller the actual profit earned by the taxpayer on relevant foreign income, the greater the proportion of the foreign tax on that income which was capable of being credited against the tax on domestically sourced income. He draws attention to the comments of the Commissioners at paragraph 23 of the Interim Decision where they say that his submissions on behalf of the Revenue gave "a commonsense result" and at paragraph 31 a result " that it might be expected Parliament and the treaty negotiators to have wished to achieve".
42. It seems to me that, whereas it is accepted that taxing statutes, like any other statutory provisions, are to be given a purposive construction, where that purpose is apparent, in circumstances where what is in issue is not the purpose of giving relief against foreign tax, but which between two possible ways of conferring that relief was intended by the negotiators or by Parliament, it is more difficult to point with confidence to the objective intended. It is accepted that the Revenue's construction of the relevant provisions results in a substantial part of LGAS' foreign income not qualifying for credit relief. This result must be contrasted with Article 24 of the sample treaty itself which is headed "elimination of double taxation" and starts with the words "double taxation of income shall be avoided as follows". I read the words of Mr Justice Hoffmann in the Wimpey case "in my view double taxation relief is intended to ensure that the taxpayer does not suffer tax twice charged upon the same income" in the same sense. If double taxation is to be eliminated in circumstances similar to those of the example, it must follow that the taxpayer should be entitled to credit, against the UK corporation tax thrown up by its computation, for foreign tax paid in the relevant period of assessment, such credit to be limited only so that the foreign tax cannot exceed the UK tax which would have been chargeable on that income.
43. For these reasons it is my conclusion that the Revenue's appeal on issue 1 must be dismissed.

Issue 2

44. I refer back to paragraph 3 above for a summary of the parties' rival positions on this issue. I have come to my conclusion on the basis of a series of steps which I will now set out:-

i) Having in sub-sections (1) and (2) set out that corporation tax is to be computed in accordance with income tax principles, ICTA section 9(3) provided:-

"9(3)  Accordingly, for purposes of corporation tax, income shall be computed, and the assessment shall be made, under the like Schedules and Cases as apply for purposes of income tax, and in accordance with the provisions applicable to those Schedules and Cases, but (subject to the provisions of the Corporation Tax Acts) the amounts so computed for the several sources of income, if more than one, together with any amount to be included in respect of chargeable gains, shall be aggregated to arrive at the total profits."

Under the heading "basis of, and periods for, assessment" section 12 of ICTA provides:-

"12(1)  Except as otherwise provided by the Corporation Tax Acts, corporation tax shall be assessed and charged for any accounting period of a company on the full amount of the profits arising in the period (whether or not received in or transmitted to the United Kingdom) without any other deduction than is authorised by those Acts."

Thus corporation tax is chargeable on the aggregate profits of the company in any year of assessment. That aggregate will consist of the sum of the profits computed under the different applicable Schedules and Cases to each of the separate businesses of the company if it has more than one business or source of income which is separately taxable, as did for example, the taxpayer in the Wimpey case.

ii) LGAS' life assurance business is constituted a separate business for the purpose of paragraph (i) above by section 432(1) ICTA. During the years in question the income and gains of LGAS, chargeable to corporation tax, were computed on the I minus E basis as required by the Revenue. The two alternative methods of computation were the Case I method or the I minus E method. The latter although, in a sense, a cruder method and one which usually throws up a larger figure of taxable profit, is nonetheless a way in which the profits of a life assurance company can be calculated for the purposes of corporation tax by aggregating in "I" the income of the company from its various sources in the year of assessment and its chargeable gains and deducting from that income and those gains "E", relevant expenses of management, defined by section 75, under section 76(1) ICTA. Section 76(2) restricts the amount of relevant expenses which can form part of "E" so that they shall not "reduce the corporation tax borne by the company on the income and gains of its life insurance business for any accounting period to less than would have been paid if the company had been charged tax in respect of that business under Case I Schedule D." Since the share of LGAS' expenses attributable to its pension business is taken into account in the computation of the pension business profit under section 436 on Schedule D Case I principles, it will be excluded from this computation.

iii) For the purposes of corporation tax, where a company carries on the business of providing pensions, that business is to be treated as part of the company's life assurance business; see section 431(2). During the years in question a life assurance business could comprise a number of separate categories of business. The two main categories were "basic life assurance and general annuity business" ("BLAGAB") and pension business.

iv) Where an insurance company is being taxed on the I minus E basis for the purposes of corporation tax, the income and gains flowing into that company's life assurance business, unless earmarked for a particular fund, fell to be apportioned in any year amongst the various categories of income comprised in that business in accordance with sections 432A to E of ICTA. There is no issue in the present case as to the amounts to be apportioned and how that apportionment was to take place. The income and gains so apportioned fell to be assessed for the purposes of corporation tax in accordance with the various Schedules and Cases applicable to them. Thus if UK land had been held as part of the assets of the long term insurance fund of LGAS the income flowing from that land would fall to be assessed for the purposes of corporation tax under schedule A, gross foreign dividend income on shares held as part of a long term fund under Schedule D Case V.

v) Section 436 ICTA under the heading "annuity business and pension business: separate charge on profits" provided:-

"436(1)  Subject to the provisions of this section, profits arising to an insurance company from … pension business shall be treated as income within Schedule D, and be chargeable under Case VI of that Schedule, and for that purpose—

 (a) that business of each such class shall be treated separately, and

 (b) subject to paragraph (a) above, and to subsection (3) below, the profits therefrom shall be computed in accordance with the provisions of this Act applicable to Case I of Schedule D.

    (2)  Subsection (1) above shall not apply to an insurance company charged to corporation tax in accordance with the provisions applicable to Case I of Schedule D in respect of the profits of its ordinary life assurance business. "

Section 438 ICTA under the heading "pension business: exemption from tax" provided:-

"438(1) Exemption from corporation tax shall be allowed in respect of income from, and chargeable gains in respect of, investments and deposits of so much of an insurance company's life assurance fund and separate annuity fund, if any, as is referable to pension business.

    (2)  The exemption from tax conferred by subsection (1) above shall not exclude any sums from being taken into account as receipts in computing profits or losses for any purpose of the Corporation Tax Acts."

Thus there was a special regime for the taxation of pension businesses. Income and gains from investments or deposits attributable to it were exempt from tax at source. Section 436 provided that where, as in this case, the Revenue had opted to require LGAS to account for its life assurance business on the I minus E basis, any pension business comprised in the life assurance business was to be treated separately and chargeable to corporation tax under of Schedule D Case VI for which purpose the profits of that business were to be computed on Case I Schedule D principles. Expenses referable to the pension business were to be taken into account in the Case I computation and not in the I minus E computation of the profits of the Life Assurance business generally. The limitations on the deduction of expenses under section 76(2) would not operate on pension business expenses but, if at all, on the expenses taken into account in the I minus E computation of LGAS' life assurance business profits. The pension business profits were made separately chargeable to tax under Schedule D Case VI.

vi) Foreign income apportioned to the pension business under sections 432 A to E enters the computation of the company's profits for corporation tax purposes at step (iv) above, for that purpose, calculated in accordance with section 795(2) ICTA and after any apportionment of expenses under section 797(3) (if any apportionment to the foreign income by the taxpayer is made which is unlikely).

vii) In dealing with Issue 1 I have already found, contrary to the submissions of the Revenue, that section 797 ICTA is be construed as applying a limit to the foreign income and gains calculated for the purposes of the appropriate foreign tax, grossed up by that tax, and limited to no more than the amount which the appropriate UK tax on that income would yield. See section 797(1) and (2).

This section would operate to limit the creditable foreign tax attributable to LGAS' pension business. However in agreement with the submissions of Mr Henderson its terms are otherwise irrelevant to Issue 2.

It was Mr Gammie's submission that section 436 operated only to provide a means whereby LGAS taxable profit from its pension business is to be calculated which profit then flows into the computation of the overall corporation tax chargeable on the total profits of LGAS from its life assurance business including its pension business. It would follow from this that foreign tax on income from foreign investments, attributable to that business, would be creditable to that tax.

After some hesitation I have come to the conclusion that I accept Mr Henderson's submission that the separation of the process of accounting for the profit from LGAS' pension business from the accounting of profit of LGAS' life assurance business generally by section 436 ICTA, and its separate subjection to tax under Schedule D Case VI, leads to the conclusion that foreign tax charged at source on foreign income attributable to pension business is to be creditable against that tax chargeable under that Case on the profits of the pension business. This conclusion seems to me to follow from the approach of Mr Justice Hoffmann in the Wimpey case as I have analysed it above.

In the course of submissions, counsel for both parties accepted that it was difficult to determine the precise basis upon which the Commissioners arrived at their conclusion on issue 2. I have therefore started from what I perceive to be first principles but in so doing have arrived at the same conclusion as that reached by the Commissioners. It follows that I must dismiss LGAS' appeal on issue 2.

Issue 3

45. I refer back to paragraph 4 for a summary of the parties' rival positions on this issue.
46. It is accepted that the answer to this issue turns on the true construction of section 82(1)(a) of the Finance Act 1989 as amended and as modified by section 436(3)(a) of ICTA and subsequently further amended with retrospective effect by section 43(1) of the Finance Act 1990. As so amended and modified, and as relevant to this judgment, that section is to be read as follows:-

"82(1)(a)  …there shall be taken into account as an expense (so far as not so taken into account apart from this section) any amounts of foreign tax which are expended on behalf of, holders of policies referable to pension business or annuitants in respect of the period…

     (2)  For the purposes of this section an amount is allocated to policy holders or annuitants if, and only if,—

  (a) bonus payments are made to them; or

  (b)  reversionary bonuses are declared in their favour or a reduction is made in the premiums payable by them;

and the amount of the allocation is, in a case within paragraph (a) above, the amount of the payments and, in a case within paragraph (b) above, the amount of the liabilities assumed by the company in consequence of the declaration or reduction."

47. It must be borne in mind that section 82 only applied to the computation of pension business profits where the profits of the life assurance business of the company were being assessed on the I minus E basis; see section 463(2) ICTA. It must also be borne in mind that because the question concerns the pension business of a company section 438 ICTA means that we are only concerned with income of the company bearing foreign tax because such business is exempt from UK tax on income and gains in respect of investments and deposits of so much of an insurance company's life assurance fund and separate annuity fund, if any, as is referable to pension business. We are concerned with the taxation of the shareholders' share of the profits flowing from that pension business.
48. The Commissioners dealt with issue 3 in their decision of the 19^th July 2005 ("the decision"). At paragraph 21 of the decision the Commissioners identified the purpose of section 82 "as being to separate the [foreign] tax referable to policy holders from the [foreign] tax referable to shareholders and to give a deduction for the former." It is accepted that that correctly summarises the purpose of section 82.
49. Sub-section (1)(a) permits there to "be taken into account as an expense… any amounts of foreign tax which are expended on behalf of holders of policies referable to pension business or annuitants in respect of the period…". The expense in question is not a payment by the company but the suffering by the company of deductions from income derived from investments in a foreign country which are part of the assets of the company but referable to its pension business as being apportioned to that business under sections 432A to E ICTA.
50. It is LGAS' contention that the words of section 82(1)(a) are not ambiguous. The relevant foreign income and gains referable to policyholders and the foreign tax deducted therefrom are easily identifiable and are agreed. The relevant statutory provisions contain nothing which indicates that the deduction, which sub-section (1)(a) permits, is subject to the foreign tax in question not being creditable or credited to the computed corporation tax chargeable on the profit of LGAS' pension business. Equally there is nothing in the provisions which indicates that, where a deduction is made under sub-section (1)(a), the foreign tax so deducted was not eligible for credit against that computed corporation tax. The question falls to be considered at the time that the expenditure takes place, namely, at the time of the deduction at source of the foreign tax. At that time the "expenditure" plainly fell within the sub-section. It follows that LGAS is entitled to deduct so much of the foreign tax "expended" as is referable to policy holders, notwithstanding that LGAS may also be entitled to credit in respect of the same tax against the corporation tax chargeable on the profits of the pension business under section 793(1) and section 795(2) of ICTA.
51. LGAS accepts the general proposition that the legislature must be taken not to have intended, in taxing legislation, to have given relief twice in respect of such expenditure. Nonetheless, where the words of the relevant statutory provision are plain and unambiguous, LGAS submits that there is no room for a court to construe those words so as depart from their ordinary meaning in order to give them an effect which the court believes is more consistent with the court's view of the intentions of the legislature. I accept this submission, which is supported by ample authority, and it is also accepted by the Revenue.
52. However I also accept the Revenue's contention that the evident purpose of section 82(1)(a) is to allow a deduction in the Case I computation of the profits of LGAS' pension business for certain expenses which would not otherwise be allowable: that is the force of the words "so far as not so taken into account apart from this section". Thus deductions are allowed for amounts allocated to policy holders which would not otherwise be allowable (because they would be treated as a distribution of profit to policyholders) and for amounts of foreign tax which also would not otherwise be allowable (because of the general rule that tax is not a deductible expense unless no claim has been made for credit relief and so a deduction is available under section 811 ICTA).
53. Mr Gammie submitted that Parliament in giving effect to section 82(1)(a) might well have contemplated the possibility of double relief and been prepared to contemplate it because of the complications involved in legislating to exclude it and the complexity of the calculations necessary to do so. I cannot accept that submission. Had Parliament wished to deny credit for what it had allowed to be deducted, or to allow a deduction only for that part of the foreign tax that could not be credited, it was perfectly possible for it to do so; indeed sections 795 and 811 ICTA are examples of such being done. Such an intention of Parliament would be nonsensical in the context of a Schedule D Case I computation, and should not be imputed to Parliament unless the statutory language admits no other possible interpretation.
54. In agreement with the submissions of Mr Henderson, in my view section 82(1)(a) does not require such a construction. Contrary to the submissions of Mr Gammie it seems to me that the question should be looked at the stage at which the corporation tax on LGAS' profits from its pensions business is being computed. This follows from the words in sub-section 1(a) "where the profits… are… computed …then, in calculating the profits for any period of account… there shall be taken into account… ."
55. Sub-section 1(a) uses the word "expended" to describe the process whereby part of the company's assets are disposed of for the benefit of policyholders. It does not use the word "paid". It seems to me that the words expense and expended imply a more permanent state of affairs than "payment" or "paid". Thus a payment by a company may later be repaid but an expense of a company to be included in an account is not, without more, to be expected to be recouped.
56. Thus, in the process of the Schedule D Case I computation of the profits of LGAS' pension business, it seems to me to be reasonable to construe the words "there shall be taken into account as an expense" so as to exclude amounts which have been recouped by other means or which it is anticipated will be recouped. "Expended" when later used in the sub-section is to be given a similar meaning i.e. "expended" so as to constitute an "expense" to be taken into account in the computation.
57. Alternatively it seems to me that construing those words in that way is, at least, an available alternative to the construction placed on them by LGAS. It is therefore open to me to construe those words in the manner contended for by the Revenue if I were satisfied, as I am, that the legislature cannot have intended to give double relief in respect of the same items of expenditure.
58. It will therefore be seen that I have adopted the more direct route urged on me by Mr Henderson than that adopted by the Commissioners but which leads to the same result. I do not need to consider Mr Henderson's alternative submission which the Commissioners rejected.
59. For these reasons it seems to me that LGAS' appeal against the decision of the Commissioners on issue 3 should also be dismissed.