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

When section 89(7) of Finance Act 1989 requires Case I profits for BLAGAB apportionment, it invokes the provisions applicable to a Case I computation, although the company is actually taxed on the I-E basis. The computation therefore includes the mandatory set-off of carried-forward trade losses under section 393(1) of the Taxes Act 1988. That set-off forms part of the computation of trading profits, rather than being a later relief. Including earlier losses does not distort the apportionment scheme or create an anomaly requiring a different construction. The 2003 amendment removed a restriction for later accounting periods, subject to its express temporal limitation; it did not remove the pre-existing entitlement to carry forward losses.

Sun Life carried on basic life and general annuity business. Its profits were taxed on the I-E basis, requiring apportionment between policyholders’ and shareholders’ shares. The first issue was whether unused losses from earlier years had to be carried forward when calculating Case I profits for the 2002 accounting period. The second issue concerned the effect of amendments made by the 2003 legislation on losses available for the 2003 period.

The Special Commissioner allowed the taxpayer’s argument on the first issue but accepted the Revenue’s argument on the second. Patten J reversed the decision on the first issue and decided the second issue contingently in the taxpayer’s favour: [2009] EWHC 60 (Ch). The Court of Appeal considered whether the pre-existing right to use carried-forward losses survived the amendment.

1. Disposition. Moses LJ allowed the taxpayer’s appeal on the first issue and dismissed the Revenue’s contingent appeal on the second. Lord Justice Rix and Sir Anthony May agreed.
2. Statutory scheme. Life assurance business is treated as a separate business for corporation tax but remains a trade. Its investment activities form part of that trade, as illustrated by Liverpool and London Globe Insurance Company v Bennett [1913] AC 610 and Scottish Union and National Insurance Company v Smiles (1889) 2 TC 551. The Crown Option permits taxation on either the trading Case I basis or the investment-company I-E basis, a long-standing approach illustrated by Revell v The Edinburgh Life Insurance Company 5 TC 221.
3. 2002 accounting period. Section 89(7) of Finance Act 1989 posed three questions: whether section 393 was a provision of the Taxes Act 1988, whether it was applicable to Case I of Schedule D, and whether the relevant profits were computed in accordance with it. All three questions were answered affirmatively. Section 393 was specific to trading income and therefore applicable to Case I. The express loss provisions for other categories of life assurance business did not exclude it. The redundancy argument carried little weight, consistently with Walker v Centaur Clothes Group Ltd [2000] 1 WLR 799.
4. The mandatory set-off under section 393(1) operated against trading income before aggregation. It was therefore part of the computation of Case I profits, even though section 393 was a relieving provision. The corporation tax structure described in Commercial Union Assurance Co plc v Shaw 72 TC 101 supported that conclusion. Taylor v MEPC Holdings Ltd [2003] UKHL 70 did not establish that a relief could never form part of computation; its distinction between deductions and reliefs was confined to the different group-relief issue.
5. Apportionment. Section 89 created a statutory hypothesis that BLAGAB profits were computed under Case I, although they were actually charged under the I-E basis. Carried-forward losses could therefore be included. The relevant profits and the denominator in the statutory fraction were not necessarily current-year-only figures. No distortion, absurdity or compelling anomaly resulted.
6. 2003 amendment. The amendment removed the restriction imposed by section 434A(2) for accounting periods beginning on or after 1 January 2003. Paragraph 7(3) of Schedule 33 limited that benefit to losses incurred in the period including 31 December 2002 or a later period. Nothing in the amendment removed the pre-existing right to set off earlier losses for the section 89 calculation.

• Court of Appeal (Civil Division) allowed the taxpayer’s appeal on the first issue and dismissed the Revenue’s contingent appeal on the second: [2010] EWCA Civ 394.
• High Court (Chancery Division) Patten J reversed the Special Commissioner on the first issue and decided the second issue contingently in the taxpayer’s favour: [2009] EWHC 60 (Ch).
• Special Commissioner decided that the taxpayer could carry forward earlier losses for 2002 but that the 2003 amendment restricted losses available for 2003: [2008] STC (SCD) 486.