In the First-tier Tribunal (“FTT”) case of Guardian Assurance Ltd v HMRC [2022] UKFTT 234 (TC), taxpayer’s appeal was allowed against HMRC’s determination that Guardian Assurance Ltd.’s majority stake in another insurance company did not qualify as a “structural asset” for the purposes of section 137 of the Finance Act 2012 (“FA 2012”).
The FTT upheld the Guardian Assurance Ltd.’s (“Guardian”) appeal after concluding that one of its shareholdings constituted a structural asset employed in the company’s operations and that relief could be claimed upon sale. Therefore, dividend income and capital gains were not subject to taxation as trading earnings.
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History between Guardian and ELFC
Guardian is a leading life insurance company, established in 1821. Guardian bought a stake in Montreal Life Insurance Company (“Montreal”), a Canadian life insurance company in 1980. After 3 years in 1983, this ownership had expanded to 99% of Montreal’s shares. In 1986, Guardian and Empire Life Financial Services Corporation (“ELFC”) formed a joint venture. Empire Life Insurance Company (“ELIC”) was owned by ELFC. As part of their joint venture, Guardian and ELFC concurred to combine Montreal and ELIC to create Empire Life Financial Services Limited (“ELFS”), a new holding company. According to the shareholders agreement, Guardian would hold its equity in ELFS through a distinct fund.
On the grounds that it was long-term company fixed capital, Guardian excluded receipts, expenses, and changes in capital value resulting from this holding from the calculation of trading profits. According to HMRC, this wasn’t a structural asset of the company.
Guardian’s tax returns for the years 2013, 2014, and 2015 were modified by HMRC’s closure notice, which was issued on August 30, 2018, in connection with an investigation into Guardian’s tax issues.
Closure Notice and Guardian’s Appeal
According to the closure notice, Guardian’s profits due to corporation tax were boosted by £2.7 million in dividend income and £96.4 million in higher share value. Also, HMRC made two consequential amendments: (i) to the return for the period ending December 31, 2014, HMRC added additional dividend income of £3.4 million and a share value increase of £19 million; and (ii) to the return for the period ending December 31, 2015, HMRC added a loss on disposal of £63.9 million and a gain from currency hedging of £17.8 million.
Guardian made an appeal to the FTT regarding the closure notice.
The main question on appeal was whether Guardian’s ownership of ELFS during the relevant time qualified as a “structural asset” and, consequently, as “long-term business fixed capital” under section 137 of FA 2012.
Decision of the FTT
The Guardian won in the FTT decision. The holding was put at risk for usage in the business. It operated in a sector that was strikingly similar to that of the taxpayer company. The claim that the shareholding was a structural asset gained support from the fact that it had been held for almost 30 years.
Due to the lack of case law defining “structural asset,” the FTT used the files from the Finance Bill 2007’s Committee Stage, where a minister defined structural assets as “assets owned by an insurance firm as part of its trading structure.”
HMRC argued that the shareholding was “at risk” in the company and that any investment income should be viewed as trading income, this was rejected by the FTT. In evaluating whether the asset was structural, FTT did not find HMRC’s argument worthwhile, that the Guardian’s policyholders benefited from the asset more than its shareholders.
The FTT believed that Guardian’s power to choose board members showed control and influence over ELFS and that this implied the shareholding was a “structural asset.” The FTT also mentioned that Guardian owned the shares for a considerable amount of time (around 30 years) and that they were in a company that was quite similar to its own. Both of these elements were relevant in the FTT’s eyes, and they supported Guardian’s claim that the shareholding was a structural asset.
The appeal was allowed.
What did the Case Highlight Regarding “Structural Assets”?
According to the FTT, a “structural asset” is defined as a holding that is a part of the trading structure of the relevant insurance company for the purposes of section 137 of FA 2012. Although not all fixed capital assets will be “structural” assets, the decision gives some assurance that such an asset will consist of fixed capital as opposed to circulating capital. It’s interesting to note that the FTT stated that comparing capital vs revenue spending introduced an unneeded layer of complication and took attention away from section 137’s true wording. It’s helpful that the FTT listed a few elements that it thought were crucial in establishing whether an asset was “structural,” like the duration of ownership and the type of business.
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