Scottish Widows plc v Commissioners for Her Majesty's Revenue and Customs (Scotland)

Under section 83(2) of the Finance Act 1989, an increase or reduction in the value of a life assurance company’s long-term business fund is determined by the value which the company brings into account in its prescribed regulatory revenue account. The words “as brought into account” concern both the manner and the amount of recognition, rather than merely the accounting period.

Where a company elects to use book values in its regulatory return, those values govern its Case I computation even if market values moved differently. General principles favouring taxation by reference to commercial profits remain prima facie guides. They yield, however, to clear special rules enacted for life assurance business.

Following the demutualisation of a life assurance society, its business and assets were transferred to Scottish Widows plc. The transfer scheme established a memorandum account called the capital reserve within the company’s long-term business fund. During three accounting periods, the market value of the fund’s assets fell. The company nevertheless brought amounts described as transfers from the capital reserve into line 15 of its prescribed form 40 regulatory returns.

The Special Commissioners held that section 83(2) of the Finance Act 1989 did not apply but that section 83(3) did, so the amounts were receipts. The Inner House, by a majority on section 83(3), reached the same result: [2010] CSIH 47. The company appealed on section 83(3), while HMRC cross-appealed on section 83(2).

The central issue was whether an increase in value under section 83(2)(b) meant an actual increase in the assets’ market value or the increase recognised in the prescribed regulatory account.

1. HMRC’s cross-appeal was allowed unanimously. Lord Hope and Lord Walker gave the principal reasons. Lady Hale, Lord Neuberger and Lord Clarke agreed that section 83(2) of the Finance Act 1989 governed the amounts. The Inner House’s interlocutor was recalled, and the referred question was answered in the affirmative.

2. Section 83(2) creates a special rule for computing the Case I profits or losses of life assurance business. Read with section 83A, the words “as brought into account for a period of account” require the computation to follow the manner and extent to which the items were entered in the prescribed regulatory revenue account. They do not merely identify the relevant accounting period. Where the company chooses book values for form 40, those values determine whether an increase or reduction has occurred and its amount: per Lord Hope at paras 20–23; Lord Walker at paras 107–113; Lady Hale at paras 114–118; Lord Neuberger at paras 124–130.

3. The capital reserve was a memorandum account within the long-term business fund. It was an accounting abstraction and did not consist of separate identifiable assets. Amounts described as transfers from that reserve represented value already within the fund which the company chose to recognise. They therefore fell to be treated like other assets of the fund for regulatory purposes and under section 83(2): per Lord Hope at paras 25–27 and Lord Walker at paras 87–102.

4. General tax principles favour computation by reference to commercial profits and gains and ordinarily use current accounting practice as a guide. Those principles are prima facie rather than absolute. The express language of the specialised life assurance regime controlled the computation. The statutory scheme linked tax treatment to the company’s own regulatory recognition of value, including unrealised value.

5. Because section 83(2) applied, section 83(4)(b) excluded the operation of section 83(3). Lord Hope stated, as an alternative view, that section 83(3) involved two stages: an amount must first be added in connection with a business transfer and later brought into account to reduce or eliminate a loss. He would have held that the amounts satisfied both stages. The other members preferred to express no view on section 83(3), and the company’s appeal on that issue was moot.

1. United Kingdom Supreme Court: HMRC’s cross-appeal was allowed unanimously. The interlocutor of the Inner House was recalled and the referred question was answered affirmatively. The company’s appeal was treated as moot: [2011] UKSC 32.
2. Inner House of the Court of Session: The company’s appeal was refused by a majority, Lord Emslie dissenting, and HMRC’s cross-appeal was refused unanimously: [2010] CSIH 47; 2010 SLT 885; 2010 STC 2133.
3. Special Commissioners: The commissioners decided section 83(2) in the company’s favour but section 83(3) in HMRC’s favour, and answered the referred question affirmatively: [2008] UKSPC 664.