Sun Life Assurance Company of Canada (UK) Ltd v HM Revenue & Customs

For the purposes of calculating the policyholders’ share of relevant profits under sections 88 and 89 of the Finance Act 1989, “Case I profits” means the current-period trading profits computed under Case I of Schedule D. It does not include a deduction for losses carried forward under section 393 of the Income and Corporation Taxes Act 1988. Section 393 operates as a statutory relief after trading income has been computed; it does not alter the Case I profit figure for the relevant accounting period. The statutory apportionment is intended to compare like with like. The 2003 amendments provided the only applicable loss adjustment for later periods and did not preserve relief for pre-2002 losses.

Sun Life carried on basic life assurance and general annuity business. It sought to deduct unused Case I trading losses from its Case I profits when calculating the policyholders’ share of relevant profits under sections 88 and 89 of the Finance Act 1989.

The Special Commissioners decided that the deduction was available for the accounting period ending 31 December 2002, but unavailable for the period ending 31 December 2003 because of amendments made by the Finance Act 2003. Sun Life appealed on the 2003 issue and HMRC cross-appealed on the 2002 issue. The central questions were whether section 393 of the Income and Corporation Taxes Act 1988 formed part of the Case I computation under section 89, and what effect the 2003 amendments had.

1. Cross-appeal allowed. “Case I profits” in section 89(7) of the Finance Act 1989 refers to profits computed from the receipts and expenses of the relevant accounting period under Case I of Schedule D. The phrase does not include losses carried forward under section 393 of the Income and Corporation Taxes Act 1988. (See paras [31]–[42].)
2. Corporation tax computation involves distinct stages. Trading income is first computed under the relevant Schedule and Case. Section 393 then gives relief by setting an earlier trading loss against later trading income. That relief reduces trading income for the purposes of total profits and corporation tax, but does not alter the Case I profit figure produced by the current-period computation. (See paras [39]–[42].)
3. The wording and structure of sections 88 and 89 require a like-for-like comparison between relevant profits and Case I profits for the same period. Including accumulated earlier losses would distort both the deduction under section 89(1) and the fraction in section 89(3), because no equivalent adjustment would be made to the I-minus-E figure. (See paras [43]–[45].)
4. Sun Life’s appeal concerning 2003 was dismissed. Section 89(7), as amended by paragraph 7 of Schedule 33 to the Finance Act 2003, operated through section 76(2C) of the Income and Corporation Taxes Act 1988. Paragraph 7(3) restricted that adjustment to losses incurred in the accounting period including 31 December 2002 or a later period. Since section 393 did not previously apply to section 89, Sun Life’s pre-2002 losses were unavailable. (See paras [47]–[55].)
5. The Explanatory Notes to the 2003 Finance Bill added nothing to the construction of the pre-2003 legislation. The court therefore did not rely on them. (See paras [56]–[58].)

• Special Commissioners: On 11 December 2007, held that unused losses could be deducted for the 2002 accounting period but not for 2003 following the Finance Act 2003 amendments.
• High Court (Chancery Division): Allowed HMRC’s cross-appeal on the 2002 issue and dismissed Sun Life’s appeal on the 2003 issue.