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Life Company Taxation

The recent case of Prudential Assurance Co Ltd v Bibby has now been heard, at appeal, in the High Court.

As was reported in a previous bulletin (14th May 1999) the case involved Prudential`s life assurance and pensions business, and the issue of whether it was correct for Prudential not to deduct charges on income in computing its relevant profits for the purposes of section 88 FA 1989 (policyholders share of relevant profits taxed at basic rate only) but instead deduct them from its total profits chargeable at the full corporation tax rate.

Burton J agreed with the Prudential`s contention that, in computing its total profits, management expenses were to be deducted. Section 338(1) ICTA 1988 provided that in computing the corporation tax chargeable charges on income paid by the company should be allowed as deductions against the total profits. Section 88(3) FA 1989 goes on to define the relevant profits as meaning the total profits subject to the specified adjustments in respect of management expenses, loss relief and group relief. Those were the only required adjustments to the total profits in computing the relevant profits and accordingly section 88(3) did not include the deduction on income.

The Court agreed with Prudential`s submission that Section 88(3) did not, therefore, expressly or impliedly require that charges should be deducted from the relevant profits, or that the charges should be deducted pro rata from the total profits, and that there was accordingly no express provision in Section 88(3) which prevented it in computing the corporation tax chargeable from deducting the charges from such part of the total profits as it chose.

The Court further agreed that, in the absense of a contrary statutory provision, in computing relevant profits there was no general principle of rateable allocation of charged against total profits and that it was to be assumed that a company acted in whatever way open to it was most business-like and advantageous. It therefore followed that Prudential was entitled in computing the corporation tax chargeable to deduct the charges from such part of its total profits as it chose, and therefore to deduct the charges from that part of its total profits which were charged at the normal corporation tax rate, and was not obliged to deduct them from the relevant profits which were taxed at a lower rate.

The Court thus agreed with the Prudential`s contentions, and the appeal was allowed.


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