Ayrshire Employers’ Mutual Ins Co v IRC [1946] UKHL 3 (29 March 1946)

Ayrshire Employers Mutual Insurance Association
Inland Revenue

At delivering judgment on 29th March 1946,—

LORD THANKERTON .—This appeal arises out of an assessment to income tax made on the respondent Association for the year ended 5th April 1936, on the sum of £13,492, being the estimated surplus arising in that year from the transactions of the Association with its members. It is not disputed that the assessment was made on the footing that such surplus constituted profits chargeable to income tax by virtue of section 31 of the Finance Act, 1933, and could not otherwise be justified. On appeal, the Special Commissioners affirmed the assessment, and, on the requisition of the Association, stated a case for the opinion of the Court of Session, the question of law being “Whether the surplus arising from transactions of insurance of the Association with its members is assessable to income tax by virtue of the said section 31 (1) of the Finance Act, 1933?” The case was heard by the First Division of the Court of Session, by whose interlocutor dated 20th July 1944 the appeal was sustained and the question of law submitted for their opinion was answered in the negative. Hence the present appeal by the Crown.

It had been settled in a series of cases in this House, beginning with New York Life Insurance Co. v. Styles and ending with Municipal Mutual Insurance, Limited, v. Hills, that the surpluses arising out of transactions of purely mutual insurance between an association and its members, or between an association as insurers and the policy holders as the insured, were not assessable to income tax. The ground of these decisions is well summarised by my noble and learned friend Lord Macmillan in the Municipal Insurance case(at p. 448) as follows:

“The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus, and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial,”

and, earlier on the same page he stated, “as the common fund is composed of sums provided by the contributors out of their own moneys, any surplus arising after satisfying claims obviously remains their own money.” It may be added, however, by way of contrast, that such surpluses were held liable to be included in computing profits for the purposes of corporation profits tax, by virtue of the express provisions of paragraph (h) of subsection (2) of section 53 of the Finance Act, 1920, the material part of which provides, “profits shall include in the case of mutual trading concerns the surplus arising from transactions with members. …”

The Crown concedes that the respondent Association is a typical mutual insurance society, indemnifying its members in respect of claims by their workmen for injuries arising out of accidents, and its members being the only contributors and the only Participators, and that the surpluses arising on its transactions would not have been assessable to income tax, in view of the decisions already referred to, but the Crown maintains that such liability is imposed by the provisions of section 31 of the Finance Act, 1933, the material part of which enacts as follows:—

“31.—(1) In the application to any company or society of any provision or rule relating to profits or gains chargeable under Case I of Schedule D (which relates to trades) … any reference to profits or gains shall be deemed, to include a reference to a profit or surplus arising from transactions of the company or, society with its members which would be included in profits or gains for the purposes of that provision or rule if those transactions were transactions with non-members, and the profit or surplus aforesaid shall be determined for the purposes of that provision or rule on the same principles as those on which profits or gains arising from transactions with non-members would be so determined.”

(3) It is hereby declared that, in computing, for the purposes of any provision or rule mentioned in subsection (1) of this section, any profits or gains of a company or society which include any income which is chargeable to tax by virtue of the foregoing provisions of this section, there are to be deducted as expenses any sums which—(a) represent a discount, rebate, dividend, or bonus granted by the company or society to members or other persons in respect of amounts paid or payable by or to them on account of their transactions with the company or society, being transactions which are taken into account in the said computation; and (b) are calculated by reference to the said amounts or to the magnitude of the said transactions and not by reference to the amount of any share or interest in the capital of the company or society.

“(7) In this section the expression ‘company or society’ means, any incorporated company or society whether incorporated in the United Kingdom or elsewhere. …”

On behalf of the appellants the Attorney-General submitted three points of construction of subsection (1) of the section. He maintained, in the first place, that the word “members”—once used in the subsection—should not be construed as confined to members of the company or society in the strict sense, but should be held to include contributor-participators in an exclusively mutual transaction of insurance, such as was the case in Municipal Mutual Insurance, Limited, v. Hills, in which the members of the company were not parties to the mutual insurance, nor entitled to participate in any surplus arising thereon. In the second place, the Attorney-General contended that the phrase “if those transactions were transactions with non-members” did not mean that the two sets of transactions could be treated as identical, but only involved that, though the respondent association had no transactions with non-members, the transactions with their members were not to be treated as mutual transactions, and any surplus arising from them would be taxable profit. In the third place the Attorney-General contended that, on a proper construction, the subsection provides that the surpluses are to be deemed to be profits.

The first contention of the Attorney-General appears to me to be completely negatived by the definition of “company or society” in subsection (7), which limits the members referred to in subsection (1) to members of an incorporated company or society, and cannot include contributor-participators in an exclusively mutual insurance scheme, who are not members of the incorporated company or society, who are the insurers. These contributor-participators would, accordingly, be included among the non-members referred to in the subsection, and this would apparently create havoc in the second contention. In other words, the class of mutual insurance concerns exemplified by the Municipal Mutual Insurance case will remain exempt from liability to assessment to income tax, and their transactions would fall to be included among “transactions with non-members,” and the companies, or societies who are struck at by the subsection would hardly object to having their transactions treated as if they were transactions of that class of non-members.

It was hardly surprising that the learned Attorney-General stated that, if he was wrong in his first contention as to the meaning of “members,” he was not prepared to say that he could succeed in the appeal. Accordingly, I find it unnecessary to deal further with his contentions, and I am of opinion that the appeal fails, and should be dismissed with costs, the judgment of the First Division of the Court of Session being affirmed.

LORD MACMILLAN .—The respondent Association was assessed to income tax on a sum of £13,492 for the year ended 5th April 1936. This sum represented the surplus arising from the Association’s transactions of mutual insurance with its members. The question of law for determination is formulated in the case stated by the Special Commissioners as follows:—

“Whether the surplus arising from transactions of insurance of the Association with its members is assessable to income tax by virtue of section 31 (1) of the Finance Act, 1933?”

The Special Commissioners answered the question in the affirmative, but their decision was reversed by the First Division of the Court of Session on appeal. The Crown is now in turn the appellant in your Lordships’ House.

The Association was incorporated in 1898 as a company limited by guarantee. It has no share capital and its transactions are exclusively with its own members. Its purpose is to insure its members on the mutual principle against liability for injuries to their workmen. The constitution of the Association is typical of mutual insurance companies and its familiar provisions are fully set out in the opinion of Lord Fleming. In a series of well-known cases before the enactment of the Finance Act of 1933 this House held that a mutual insurance company was not liable to be taxed in respect of a surplus arising from the excess of premiums contributed over claims met. The ground of these decisions was that such a surplus was not profit within the meaning of the Income Tax Acts, but merely represented the extent to which the contributions of those participating in the scheme had proved in experience to have been more than was necessary to meet their liabilities. The balance or surplus was the contributors’ own money and returnable to them. Nothing had been earned and nobody had made a profit. Section 31 (1) of the Act of 1933 was passed after these decisions and, no doubt, in consequence of them.

The Attorney-General with engaging candour submitted that he ought to succeed because, although the subsection might not in terms fit the case, it was nevertheless manifest that Parliament must have intended to cover it; if it did not cover it, then he could not figure any case which it could cover, and Parliament must be presumed to have intended to effect something. I can imagine what he would, have said had the case been the converse one of a taxpayer pleading that, although the words of the charging enactment covered his case, it was nevertheless manifest that Parliament could not have intended to tax him. With this deprecatory preface the Attorney-General endeavored to attack the decision of the First Division.

The structure of section 31 (1) is quite simple. It assumes that a surplus arising from the transactions of an incorporated company with its members is not taxable as profits or gains. To render such a surplus taxable it enacts that the surplus, although in fact arising from transactions of the company with its members, shall be deemed to be something which it is not, namely, a surplus arising from transactions of the company with non-members. The hypothesis is that a surplus arising on the transactions of a mutual insurance company with non-members is taxable as profits or gains of the company. But unfortunately for the Inland Revenue the hypothesis is wrong. It is not membership or non-membership which determines immunity from or liability to tax; it is the nature of the transactions. If the transactions are of the nature of mutual insurance, the resultant surplus is not taxable, whether the transactions are with members or with nonmembers.

The argument for the Crown sought to make out that the expression “transactions with non-members” in the subsection meant transactions not of a mutual character, and submitted that a mutual transaction with a non-member was a contradiction in terms. But this is a misconception. There is nothing to prevent a mutual insurance company entering into a contract of mutual insurance with a person who is not a member of the company. The argument will not fit the terms of the subsection. It is “those transactions,” that is mutual transactions with members, which are to be treated as if they were transactions, that is mutual transactions with non-members. But it is unnecessary to elaborate the point, for I find myself in complete agreement with the opinions expressed by the Lord President and his brethren, which are as unanswerable as they are admirably lucid. The Legislature has plainly missed fire. Its failure is perhaps less regrettable than it might have been, for the subsection has not the meritorious object of preventing evasion of taxation, but the less laudable design of subjecting to tax as profit what the law has consistently and emphatically declared not to be profit. I should dismiss the appeal.

LORD WRIGHT (read by Lord Thankerton).—I do not feel, that I can add anything to the brilliant and incisive judgment of the Lord President, with which I am in complete agreement. His logic is unanswerable. I can see no escape from the conclusion at which he has arrived. The appeal should, in my opinion, be dismissed.

LORD SIMONDS .—I am so fully in accord with the view felicitously expressed by the Lord President that I should be content to do no more than state my concurrence but for the argument addressed to the House by the Attorney-General.

The case is an unusual one. The section under discussion, section 31 of the Finance Act, 1933, is clearly a remedial section, if that is a proper description of a section intended to bring further subject-matter within the ambit of taxation. It is at least clear what is the gap that is intended to be filled and hardly less clear how it is intended to fill that gap. Yet I can come to no other conclusion than that the language of the section fails to achieve its apparent purpose, and I must decline to insert words or phrases which might succeed where the draftsman failed.

I need not restate the facts of the present case or the history of judicial decisions which led to the enactment here in question. The vital words for your Lordships’ consideration are “a profit or surplus arising from transactions of the company or society with its members which would be included in profits or gains for the purposes of that provision or rule” (i.e., under Case I of Schedule D) “if those transactions were transactions with non-members.” The Attorney-General argued, and there was, I think, some force in his argument, that in the passage I have cited the expression “non-members” means persons who are not contributors to and participators in a mutual insurance scheme, and does not mean persons who are in the strict sense not members of a company or society according to its constitution or rules. The badge of membership, he said, for the purpose of this section is contribution and participation in some mutual scheme. I do not think it necessary to decide this question, which may in other connexions have far-reaching importance. For, assuming for this purpose that the argument is so far well founded, the Attorney-General is still faced with a difficulty which appears to me, as it did to the learned Lord President, to be insuperable. For the hypothetical profit or surplus with which the section deals is one that is assumed to arise out of “those transactions” with “non-members.” What are “those transactions”? They are ex hypothesitransactions in which the element of mutuality is an integral, essential and inseparable part. How then can the two factors coalesce? On the one hand a transaction in which mutuality is essential, on the other hand a party to that transaction who by the postulated definition of non-member is excluded from any transaction which involves just that element of mutuality. It follows that upon an initial assumption in favour of the Attorney-General the section becomes meaningless and the hypothetical profit or surplus indeterminable. The appeal must, in my opinion, be dismissed.

LORD UTHWATT .—This case was dealt with by the First Division of the Court of Session and argued in this House by the appellants upon the assumption—dictated by the form of the case stated—that the relevant terms of the contracts of insurance between the company and its members were such that, apart from section 31 of the Finance Act, 1933, no taxable profit could thereby arise to the company. Into the validity of this assumption it is not permissible to enter. The assumption implies that in the case of a member all those terms in the articles of association which secure to him rights in respect of surplus contributions—as those articles stand at the date of his contract of insurance—enter into and form part of the contract of insurance. The member therefore as respects surplus contributions can rely not only on his rights as a member of the company under the articles but also on his contractual rights.

Upon the construction of section 31 it is, in light of the definition of company or society, beyond dispute that the members there referred to are members of the company or society under consideration. The subsection brings within the compass of profits or gains for purposes, of income tax the surplus which would arise if transactions with members were transactions with non-members. The status of membership and all that results from that status are to be ruled out. But, there the section stops. The ruling out of the status of membership and its consequences leaves unaffected the substance of the contract and in that there is inherent the right in respect of surplus contributions. There is therefore—on the assumption made—no sum finding its origin in payments under the contract which can enter into the “profit or surplus” referred to in the section. I would dismiss the appeal.


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