The case of Last v London Assurance Corporation [1884] 2TC100
concerned a proprietary office carrying on an insurance business.
The Corporation and its shareholders formed a body quite distinct
in personality and in interest from those insured. A member of the
corporation might effect an insurance with it, but that
circumstance could neither enlarge or diminish their rights as a
partner. The Corporation was not carrying on a mutual trade.
The Corporation, as a branch of its business, dealt in what
were called ‘participating’ policies. These were issued
to all persons, whether members or not, who had insurable lives,
and were willing to pay premiums on a higher scale than those
charged for ordinary or non- participating policies. In
consideration of these increased payments the Corporation undertook
to return to the holders of participating policies by way of bonus
or abatement of premium, two-thirds of any surplus funds applicable
to such policies, which were to be ascertained and allotted every
five years. The one-third retained by the Corporation admittedly
represented business profits; and it was not in dispute that the
remaining two- thirds would also have been profits of the
Corporation except for its agreement to return that amount to the
insured. The point at issue before the courts was whether the
two-thirds of surplus payable to the participating policyholders
fell to be deducted from receipts in ascertaining the
Corporation’s trading profits. By a majority of two to one
the House of Lords decided that the two thirds of profits paid to
participating policyholders was in reality a share of profits.
Their Lordships reaffirmed the position that the destination of
profits once earned has no bearing on the computation of those
profits for tax purposes. Lord Fizgerald saying at page 129 of
2TC:
The premiums payable by the participating policy holders come into the coffers of the Company quarterly, half-yearly, or annually in ordinary course, and form part of the annual income of the concern. When received those moneys are probably invested, the profit of the investment also forming a part of the income, and I cannot see that they the less form part of its annual income because that at a subsequent period of time a part of the gross profits (if any) realised may be allotted to certain of the policy holders. It seems to me, on the contrary, to be annual "income" after deducting the proper expenses of earning it, and subject to income tax notwithstanding its subsequent special destination. The prospect of a future participation in profits is held out as an inducement to customers to insure in the participating series, and probably has proved to be successful, but it seems to me, my Lords, to be a very forced interpretation of the contract and position of the parties to put it down as part of the expenses of making the income.
Lord Radcliffe, referring to the general principle said, in Sharkey v Wernher [1955] 36TC275 at page 302:
Later decisions have shown that this simple proposition may cover what are to be regarded as two separate questions, whether a man can trade or deal with himself and whether a man can make taxable profit by so doing.
A leading early case on mutuality, Styles v New York Life
Insurance Company [1889] 2TC460 seemed to have answered the first
of Lord Ratcliffe’s questions in the negative. New York Life
had no shares or shareholders and carried on the business of mutual
insurers. The company had a branch in London. The company had no
members other than the holders of participating policies, to whom
all the assets of the company belonged. Each policyholder was a
member of the company, and was entitled to a share of the assets of
the company and liable to all losses and expenses incurred by the
company. The majority of any annual surplus of premiums over
expenditure was returned to members; either as an increase in the
sums for which they were insured or as a reduction in their
premiums. Nothing was paid out in cash. Any balance of surplus was
carried forward. It seemed that the courts took the view that the
company was not trading - the House of Lords taking the view that
mutual insurance was not a trade at all. Lord Bramwell said that
there could not be a trading profit where there was only one party
to a transaction and because of the identity between the company
and its members, there was effectively only one party here.
New York Life distinguished its position from that in the
case of London Assurance Corporation (see above) citing the
following differences:
The General Commissioners found that:
The High Court and the Court of Appeal following the decision in Last v The London Assurance Corporation held that the New York Life was assessable. In the lower courts the Judges seem to have attached importance to the fact that the society was incorporated, and was an entity distinct from the members composing it.
The House of Lords (by a majority of four to two) distinguished between policyholders who were members of the company (participating policyholders) and those who were not (non- participating). Lord Watson explained the difference at pages 469 - 470:
The Appellant Company, so far as regards its membership, is constituted upon the principles of mutual assurance. The Company issues life policies of two kinds, participating and non-participating; but the relations existing between the Corporation and the two classes of insured differ materially. There are no shares and no shareholders in the ordinary sense of the term; but each and every holder of a participating policy becomes, ipso facto, a partner of the Company with a voice in its administration, entitled to a share of its assets and liable for all losses and expenses incurred by it. On the other hand, the holder of a non-participating policy is not a partner of the Company; he is a creditor merely without any interest in its assets and without any liability for its debts.
The profits on dealings with non-participating members were
assessable and this was not disputed in the courts.
The House of Lords (by a majority of four to two) appeared to
say that mutual insurance did not amount to a trade. Lord Watson
commenting, at page 471, said:
When a number of individuals agree to contribute funds for a common purpose, such as the payment of annuities, or of capital sums, to some or all of them, on the occurrence of events certain or uncertain, and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them, I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits. That consideration appears to me to dispose of the present case. In my opinion, a member of the Appellant Company when he pays a premium makes a rateable contribution to a common fund, in which he and his co-partners are jointly interested, and which is divisible among them at the times and under the conditions specified in their policies. He pays according to an estimate of the amount which will be required for the common benefit; if his contribution proves to be insufficient he must make good the deficiency; if it exceeds what is ultimately found to be requisite, the excess is returned to him. For these reasons I have come to the conclusion that the transactions of the Appellant Company in so far as these relate to the participating policies, do not constitute the carrying on of a trade within the meaning of the Income Tax Acts, and that the surplus funds returned or credited to its members are not profits.
