England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE, CHANCERY DIVISION
(THE HON MR JUSTICE PETER SMITH)

		Royal Courts of Justice Strand, London, WC2A 2LL
		12 June 2003

Lady Justice Arden :

1. This is an appeal by the Inland Revenue with the permission of Peter Gibson LJ against the decision of Peter Smith J dated 5 July 2002 ([2002] STC 1020). The sole question arising on this appeal is whether, on the true construction of paragraph 55(2) of Schedule 8 to the Finance Act 1995, a reinsurance treaty entered into on 25 November 1994 by the taxpayer reinsurer with a non-resident cedant is, by virtue of the fact that policies of life assurance ceded by that treaty were issued before 1 November 1994, within the following opening words of such paragraph:-

"Where the policy or contract for any life assurance business was made before 1 November 1994 …"

2. The Special Commissioners (Dr Nuala Brice and Theodore Wallace) and Peter Smith J answered this question affirmatively. (They also considered other questions which are not in issue on this appeal). The Inland Revenue, for whom Miss Ingrid Simler appears, contends that the opening words of paragraph 55 refer, in the case of a reinsurance treaty entered into before 1 November 1994, to that treaty with the result that the question set out above ought to be answered in the negative. The relevant treaty in this case was not entered into before that date.
3. Paragraph 55 of Schedule 8 to the Finance Act 1995 appears in Part III of that Schedule and it sets out certain commencement provisions for new provisions for the charging of corporation tax on (so far as material) two types of insurance business, namely overseas life assurance business and basic life assurance and general annuity business, known respectively by their acronyms as "OLAB" and "BLAGAB". The changes included new definitions of these terms. OLAB, as it existed before the Finance Act 1995 ("old OLAB"), was defined by section 431(2) of the Income and Corporation Taxes Act 1988 ("ICTA") as follows (unless the context otherwise required):-

"overseas life assurance business –

(a) in the case of life assurance business other than reinsurance business, means business with a policy holder or annuitant not residing in the United Kingdom the policy or contract for which was effected at or through a branch or agency outside the United Kingdom where life assurance business is carried on; and

(b) in the case of reinsurance business, means business the contract for which was effected at or through a branch or agency outside the United Kingdom where none, or no significant part, of the reinsurance business carried on relates to life assurance business with policyholders or annuitants residing in the United Kingdom."

4. BLAGAB, as it existed before the Finance Act 1995 ("old BLAGAB"), constituted under the same provision a residual category of insurance business:-

"basic life assurance and general annuity business means life assurance business other than pension business and overseas life assurance business;"

5. It is common ground that before the Finance Act 1995 the taxpayer's relevant business was old BLAGAB.
6. The principal change in the definition of OLAB effected by the Finance Act 1995 was to remove the need for the business to be written through a branch or agency outside the United Kingdom. Thus a new definition of OLAB ("new OLAB") was substituted by section 431D(1) of ICTA, as inserted by Part I of Schedule 8 to the Finance Act 1995, in the following terms:-

"431D.(1) In this Chapter "overseas life assurance business" means life assurance business other than pension business or life reinsurance business, which –

(a) in the case of life assurance business other than reinsurance business, is business with a policy holder or annuitant not residing in the United Kingdom, and

(b) in the case of reinsurance business, is –

(i) reinsurance of life assurance business with a policy holder or annuitant not residing in the United Kingdom, or

(ii) reinsurance of business within sub-paragraph (i) above or this sub-paragraph."

7. There was also a new definition of BLAGAB ("new BLAGAB"), but it remains a residual category:

"431F. In this Chapter "basic life assurance and general annuity business" means life assurance business (including reinsurance business) other than pension business, life reinsurance business or overseas life assurance business."

8. It is to be noted that under all these definitions, except old BLAGAB, life assurance business expressly includes reinsurance business. In that sense life assurance business is a portmanteau concept.
9. Different tax regimes apply to OLAB and BLAGAB, both old or new. The Finance Act 1995 made OLAB potentially more widely available, and the new provisions were made applicable to business written on or after 1 November 1994 (Finance Act 1995, Schedule 8, paragraph 55(2)). However, restrictions on (principally) the type of policyholder (being, where reinsurance was in issue, the holders of the underlying policies) were introduced. These restrictions are contained in subsections (2) to (8) of section 431D. Because these restrictions were not announced until 29 November 1994, there is a slightly later commencement date for them. They apply only where the relevant policy or contract was made on or after 29 November 1994 (Finance Act 1995, schedule 8, paragraph 55(3)).
10. The relevant commencement provisions in Part III of Schedule 8 to the Finance Act 1995 are as follows:-

"55.(1) Subject to sub-paragraphs (2) and (3) below, the amendments made by the following provisions of this Schedule have effect in relation to accounting periods beginning on or after 1 November 1994 –

paragraph 1 so far as relating to the definition of 'overseas life assurance business'.

paragraph 2 so far as relating to sections 431D and 431E of the Taxes Act 1988 …

(2) Where the policy or contract for any life assurance business was made before 1 November 1994, the amendments made by this Schedule (and the repeals consequential on those amendments) shall not have effect for determining whether the business is overseas life assurance business.

(3) Where the policy or contract for any life assurance business effected by a company resident in the United Kingdom at or through a branch or agency outside the United Kingdom was made before 29 November 1994, subsections (2) to (8) of section 431D of the Taxes Act 1988 shall not have effect for determining whether the business is overseas life assurance business."

11. Paragraph 55 of Schedule 8 (above) contains no express reference to reinsurance. However, a subsequent provision of Schedule 8 refers expressly to reinsurance:

57.(1) Except as provided by paragraphs 52 to 56 above, and subject to sub-paragraph (2) below, the amendments made by provisions of this Schedule have effect in relation to accounting periods beginning on or after 1 January 1995.

(2) Section 442A of the Taxes Act 1988 does not apply in relation to the reinsurance of a policy or contract where the policy or contract was made, and the reinsurance arrangement effected, before 29 November 1994."

12. The principal provision, for which paragraph 57(2) lays down a transitional provision, applies only where a direct insurer reinsures a relevant risk. In that event, investment return on the underlying policy is treated as spread over the period of the reinsurance arrangement:-

"442A.(1) Where an insurance company reinsures any risk in respect of a policy or contract attributable to its (c) basic life insurance and general annuity business, the investment return on the policy or contract shall be treated as accruing to the company over the period of the reinsurance arrangement and shall be charged to tax under Case VI of Schedule D …"

13. This case is concerned, not with paragraph 57(2), but paragraph 55(2). The Special Commissioners held that the reinsurance treaty in question fell within paragraph 55(2) to the extent that the underlying policies ceded to the re-insurer had been issued before 1 November 1994. It treated those policies as constituting five sixths of the business ceded. The Special Commissioners rejected the Inland Revenue's contention that the critical date was that of the reinsurance treaty. The effect of the decision of the Special Commissioners was that (to that extent) the contract of reinsurance constituted old BLAGAB. The remainder was new OLAB.

Judgment of Peter Smith J

14. The reasons which the judge gave may be summarised as follows. He held that paragraph 57(2) of Schedule 8 to the Finance Act 1995, which (as already explained) provides that section 442A of the Taxes Act 1998 "does not apply in relation to the reinsurance of a policy or contract where the policy or contract was made, and the reinsurance arrangement effected, before 29 November 1994", provided an indication that the opening clause of paragraph 55(2) referred to the underlying policy or contract. The judge also held that paragraph 55(3) (which provided a slightly later cut off date of 29 November 1994 for the application of subsections (2) to (8) of section 431D of the Taxes Act 1988) did not provide any assistance to him. The judge considered the meaning of the phrase "policy or contract". The Inland Revenue relied on section 441B(1) (which is not set out above but deals with the treatment of income arising from land held by a company as an asset linked to its overseas life business). Section 441B(1)(b) sets out a condition that the land must be "held by a company which is charged to tax under Case I of Schedule D in respect of its life assurance business as an asset by reference to the value of which benefits under any policy of insurance are to be determined, where the policy or contract (or in the case of a reinsurance contract, the underlying policy or contract) is held by a person not residing in the United Kingdom". The Inland Revenue submitted that the words in brackets made it clear that a reinsurance contract was within the words "policy or contract". The judge rejected this argument. He held that a reinsurance contract was not a "policy or contract" within the relevant provisions. Moreover, he held that the word "any" before "policy" made it clear that section 441B was dealing with a different subject matter from that dealt with by paragraph 55(2).
15. The judge further rejected arguments by the Revenue that assistance was to be found in the new definitions introduced by the Finance Act 1995. His reasoning was that paragraph 55 was a transitional provision and disapplied the new provisions and therefore they could not be relevant. The judge held that "a policy or contract for any life assurance business" for the purposes of paragraph 55(2) did not include a contract of reinsurance. He rejected the argument that the results of the construction upheld by him were absurd and produced inconsistencies between paragraph 55 and other provisions.
16. In the judge's judgment only the definition of old OLAB was relevant, and as this did not apply the business fell within the residual category of BLAGAB.

Submissions

17. Miss Ingrid Simler, for the Inland Revenue, puts a number of textual points at the forefront of her submissions. She submits first that "the business" referred to in the operative clause of paragraph 55(2) must be the business of the taxpayer and the same as that in the opening clause, and accordingly, where the taxpayer is a reinsurer, the "business" referred to in the opening clause of the paragraph must be reinsurance business. Miss Simler points out that the effect of the judge's construction is that (in the case of reinsurance) the opening words refer to the underlying policy whereas the operative part of paragraph 55(2) refers to the reinsurance business. There is, therefore, a mismatch, which makes no sense. Second, she submits that the reference to reinsurance in paragraph 57(2) is to be explained by the fact that that paragraph is concerned with the commencement of section 442A(1) for which a reinsurance arrangement is an essential element. The contrast between that paragraph and paragraph 55(2) is not, therefore, to be taken as an indication that her construction is wrong.
18. Miss Simler also submits that the judge was wrong in holding that a contract of reinsurance is not a "policy or contract for any life assurance business", and that the expression "life assurance business" is apt to include reinsurance (see, for example, the definitions of old and new OLAB). This is a point that I have already accepted when I referred to "life assurance business" as a portmanteau expression.
19. Miss Simler also criticises the judge's interpretation of the word "any". She submits that it cannot bear the weight placed on it by the judge. It could have been replaced by the word "a".
20. Miss Simler submits that the judge's construction makes a wholly illogical distinction. On his judgment, paragraph 55(3) will operate only where the cedant is a United Kingdom resident. However, it is much more likely that any potential cedant will be resident overseas, probably in the same territory as the one in which the branch of the taxpayer is situated. On the judge's construction, the policy or contract for life assurance business referred to in this paragraph is that effected by the cedant and not the re-insurer. She submits that paragraph 55(3) clearly refers to the contract effected by the person whose liability to tax is being determined, which in the case of reinsured OLAB is the reinsurer, not the cedant. Miss Simler also submits that the construction adopted by the judge gives rise to practical difficulty in establishing when particular policies were issued.
21. Miss Simler puts forward an alternative construction. She submits that if the judge was correct in holding that paragraph 55(2) in the opening phrase referred to the underlying insurance and not the contract of reinsurance, the logical consequence is that paragraph 55(2) has no effect on reinsured OLAB at all. She submits that the same reasoning as was applied by the judge to paragraph 55(2) must apply to section 431D, which contains the new definition of OLAB, and on this basis the reinsurance contract in question is properly characterised as OLAB within section 431D.
22. Mr David Milne QC, for the respondents, submits that the judge's interpretation of the opening words of paragraph 55(2) is the more natural meaning of the phrase. Moreover, on Mr Milne's submission, the meaning given by the judge is entirely logical since it is payment out under the underlying policies which governs liability under the reinsurance contract.
23. Mr Milne submits that, under the definition of new OLAB, it is the residence of the policyholder or annuitant which is relevant. Paragraph 55(2) refers to "the" business not "that" business. Mr Milne further submits that it is not surprising that paragraph 55(3) makes reference to the underlying policies since the conditions in section 431D(2) to (8) relate exclusively to underlying policies. He accepts that the words "policy or contract" could include reinsurance but submits that in the context of these provisions, particularly paragraph 57(2) of Schedule 8 and sections 442A(1) and (4) and 441B(1)(b), that phrase is a term of art referring to the underlying policies.
24. Mr Milne submits that, if there are practical difficulties resulting from the judge's construction, these should not compel a different construction at paragraph 55(2). In any event, he submits that the practical difficulties are overstated, and that it should not be difficult to ascertain the dates of the underlying contracts.
25. Mr Milne rejects the Inland Revenue's alternative interpretation. Mr Milne submits that paragraph 55(2) requires attention to be paid to the dates of the underlying policy or contracts and submits that that does not mean that paragraph 55(2) is wholly irrelevant in the case of reinsurance arrangements. He submits that it would have been curious if it had been left possible by the simple expedient of effecting a reinsurance, for the tax treatment of the business to be changed from BLAGAB to OLAB so that the related investment return is not taxed in the United Kingdom

Conclusions

26. At the end of the day, the issue on this appeal is a very short point of construction. I have come to the conclusion that the interpretation put forward by the Inland Revenue is to be preferred and that the judge was wrong. I have reached this result by applying first a textual method of construction, and then a purposive approach.
27. My starting point is that on its natural meaning, the word "contract" in the context of the phrase "policy or contract for life assurance" in paragraph 55(2) is a wide term which would obviously include reinsurance (as Mr Milne accepted). Moreover, as already pointed out, the expression "life assurance business" in the context of the provisions with which we are concerned includes the business of reinsurance. The next question is whether there is anything in the context of paragraph 55(2) to exclude these meanings in the context of paragraph 55(2). Paragraph 57(2) of Schedule 8 is relied on for this purpose, but this is a transitional provision for section 442A(1) which, as I have explained above, deals with the attribution of investment return on underlying policies when a direct insurer reinsures them. Accordingly, in that context, reinsurance is a necessary element of the charging provision. By contrast, in paragraph 55(2) reinsurance can only be relevant as an alternative to direct business. I therefore disagree with the judge's conclusion that paragraph 57(2) provides any indication that the construction preferred by the Inland Revenue is wrong. There is further reference to reinsurance in section 441B(1)(b) and I refer to this below.
28. Secondly, as a matter of substance, the Revenue's construction leads to a matching between the business referred to in the opening clause of paragraph 55(2) and that referred to in the operative part of that provision. This is consistent with the use of the words "the business" in the operative part of paragraph 55(2). I am not impressed by the argument that the operative part of this paragraph uses the expression "the" business and not "that" business. If it had used the latter phrase it would have been clear that the business referred to in both parts of the provision was the same but it seems to me that the same result is achieved by the use of the word definite article before "business". The simple reference to "the business" without further identification suggests that this business was intended to be identified with that already ascertained in the opening clause. It is not disputed that the business referred to in the operative clause must be that of the taxpayer.
29. Furthermore, the phrase "policy or contract for life assurance" must have the same meanings in paragraphs 55(2) and 55(3). Putting the two definitions of OLAB side by side, it is clear that the objective of Parliament was to remove the requirement for the taxpayer's business to be carried on outside the United Kingdom. Paragraph 55(3) is a transitional provision and it does not achieve the objective of extending the old regime to 29 November 1994 if it is to be applied, not to the taxpayer's business, but the underlying business. Moreover, it does not follow from the fact that the definition of new OLAB expressly repeats a requirement for the policyholder to be non-resident that the different expression "policy or contract for life assurance business" in paragraph 55(2) must be a reference to the underlying policyholder, as the Special Commissioners thought. Finally, of some minor relevance is the fact that the taxpayer (if a reinsurer) may not know or be able to ascertain the dates of the underlying policies ceded to it, thus making it less likely Parliament would impose a transitional provision by reference to those dates.
30. In my judgment, there is no reason not to look at the new provisions introduced in 1995. Section 441B(1)(b) contains an express reference to reinsurance, but this reference confirms that the words "policy or contract for life assurance business" include reinsurance since on their natural meaning the words "(or in the case of a reinsurance contract the underlying policy or contract)" carve out of the expression "policy or contract" a class of contract which would otherwise be within that expression. Accordingly, I reject the submissions by Mr Milne, which was supported by the judge, that the express reference to "a reinsurance contract" in this context supports Mr Milne's submission.
31. I have borne in mind Mr Milne's submission that the expression "policy or contract for life assurance" is a term of art, having a meaning restricted to direct life assurance business. However, there is no evidence that this is a term of art outside the fasciculus of statutory provisions. As a matter of statutory interpretation, a meaning which is neither a natural nor a customary meaning cannot be applied to words as a matter of a priori assumption. A meaning which is not a natural or customary meaning can be applied to words only as a matter of logical deduction from the terms or content of the provision in question. I have already identified the matters which I regard as signposts to the meaning of the relevant phrase. In my judgment, those signposts point not to the narrower meaning for which Mr Milne contends, but in the opposite direction. Accordingly, I conclude that the expression "policy or contract for life assurance" includes a reinsurance treaty. As I have explained, "the business" referred to in the operative clause of paragraph 55(2) is the taxpayer's business in question and it is the same business as the relevant business in the opening clause. Accordingly, where the taxpayer's business is reinsurance, the critical date is that of the entry by the taxpayer into the reinsurance treaty, and not the date of the underlying policies ceded to it. Accordingly, the reinsurance treaty in this case was new OLAB.
32. On this basis the alternative construction put forward by the Inland Revenue does not need to be considered, but had it been in issue I would have rejected it for the reasons put forward by Mr Milne.
33. In the circumstances, in my judgment, the appeal must be allowed.

Mr Justice Nelson:

34. I agree.

Lord Justice Mummery:

35. I also agree.

ORDER: Appeal allowed and the appellant's costs here and below be paid by the respondent, such costs to be the subject of detailed assessment if not agreed. Permission to appeal to the House of Lords refused.

(Order not part of approved judgment)