Sun Life Assurance Company of Canada (UK) Ltd v HM HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moses,A,B,Lord Justice Rix |
| Judgment Date | 16 April 2010 |
| Neutral Citation | [2010] EWCA Civ 394 |
| Docket Number | Case No: A3/2009/0486 |
| Court | Court of Appeal (Civil Division) |
| Date | 16 April 2010 |
[2010] EWCA Civ 394
IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
The Honourable Mr Justice Patten
Before: President of the Queen's Bench Division
Lord Justice Rix
and
Lord Justice Moses
Case No: A3/2009/0486
Mr David Goldberg QC (instructed by Herbert Smith LLP) for the Appellant
Mr David Ewart QC and Mr David Yates (instructed by Her Majesty's Revenue & Customs Solicitors) for the Respondent
Hearing dates: 13th-14th January, 2010
Lord Justice Moses:
This appeal concerns the taxation of the life assurance business of Sun Life Assurance Company of Canada (U.K) Limited, the taxpayer. That business is taxed under special rules. One aspect of that business is Basic Life and General Annuity Business. In the course of that business, the company undertakes investment activities not only on its own behalf but on behalf of policyholders. The company is charged to tax on all the profits derived from those activities, but the policyholders’ share of those profits is charged at a lower rate of tax than the rate at which the shareholders’ share of the profit is charged.
The imposition of two different rates of tax requires the profits of the taxpayer's life assurance business to be apportioned between the policyholders and the shareholders. It is that process of apportionment which is the first issue in this appeal. The policyholders’ share of the profits is calculated by deducting from the profits of the life assurance business the Case I Schedule D profits of the company. The taxpayer contends that, for the purposes of computing those Case I profits, it is not merely entitled but is required to carry forward and set-off unused losses from previous years. The effect of carrying forward those losses is to extinguish Case I profits for the company's accounting periods ending 31st December 2002 and 2003. If the Case I profits are thereby reduced to nothing, the policyholders’ share will not fall to be reduced and all the profits will be charged at the lower rate of tax.
The Revenue contends that the taxpayer is not entitled to carry forward unused losses from previous years in computing Case I profits for the purposes of apportionment. Accordingly, the taxpayer's Case I profits are not extinguished and the resulting shareholders’ proportion of the profits (£8.5m in 2002, £95.4m in 2003) is subject to a higher rate of tax.
This controversy gives rise to the first issue: up to 31 st December 2002 did the legislation confer a right or impose a duty to carry forward past years’ losses when computing “Case I profits” for the purposes of apportionment?
The law was amended in respect of the taxpayer's next accounting period, ending 31st December 2003, so as to make specific reference to the right to carry forward losses from previous years. But the amendment applied only to losses for 2002 and later periods. The taxpayer contends that the amendment did not remove its pre-existing entitlement to carry forward the unused losses of previous years in order to compute Case I profits for the purposes of apportionment. The Revenue contends that it permitted, for the first time, the taxpayer to carry forward losses from previous years, but that right was limited to losses for 2002 and later years.
Special Commissioner Julian Ghosh QC [2008] STC (SCD) 486 decided that the taxpayer was entitled to carry forward and deduct its past years’ unused losses for the accounting period ending 31st December 2002, so the taxpayer won on the first issue. But, on the second issue, he concluded that the amendment in 2003 limited the losses which could be carried forward in 2003 to those which had occurred in the accounting period ending 31 st December 2002. Patten J reversed that decision on both issues: in the 2002 accounting period, the taxpayer was not entitled to carry forward and deduct the unused losses of previous years [2009] EWHC 60 (Ch) [2009] STC 768. But if that conclusion was wrong, he took the view that the amendment did not serve to take away the taxpayer's previous right to carry forward the unused losses of previous years.
The First Issue: Accounting Period 2002
Resolution of the first issue turns on the meaning of “profits computed in accordance with the provisions of the Taxes Act 1988 applicable to Case I of Schedule D”, the definition of “Case I profits” in s.89, provided by s.89(7) FA 1989. But that short question of construction requires analysis of the statutory scheme for the taxation of a company's life assurance business.
The taxpayer company, like any other company, whether or not carrying on life assurance business, is charged on its profits to corporation tax ( s.6(1) ICTA 1988). Its profits consist of income and chargeable gains (s.6(4)(a)). A company's income is, for the purposes of corporation tax, computed in accordance with income tax principles (s.9(1)). Accordingly, each source of income must be identified and the income from each source will fall within the various Cases and Schedules set out in Part I of ICTA 1988 (now replaced by the Corporation Tax Act 2009) and will be computed in accordance with the Case and Schedule relevant to the source of that income (s.9(3)). Once that computation has taken place and capital gains have been computed in accordance with the Taxation of Chargeable Gains Act 1992, the amounts thus computed must be aggregated to arrive at the total profits (s.9(3)).
Life assurance business must, for the purposes of corporation tax, be treated as a business separate from any other business carried on by a company ( s.432(1) ICTA 1988). But that business is, nonetheless, a trade: a company carrying on life assurance business carries on a trade. Its investment activities are part of that trade. Indeed, they are integral to the trade since the company must have a fund easily realisable to meet claims not merely from premiums but by drawing on its investments ( Liverpool and London Globe Insurance Company v Bennett [1913] AC 610, 619). Accordingly, by virtue of s.18(3) ICTA 1988, its income, including interest and dividends from its investments, falls to be computed under Case I of Schedule D ( Scottish Union and National Insurance Company v Smiles (1889) 2 TC 551 and, Bennett 616 and 619).
But, where a company undertakes investment activity as part of its trade, the Crown has always been allowed to choose between taxing the company on the fruits of those investments as an investment company or taxing it as a trading company on its commercial profit, which will include the return on investments. The Crown cannot tax both and must make an election, called the “Crown Option”. In the case of a life assurance company, which must hold substantial investments, it is usually to the Crown's advantage to tax the company as an investment company and not on the profits of its trade ( Revell v The Edinburgh Life Insurance Company 5 TC 221 at 227). This basis of taxation is known as the I-E basis, that is, investment income plus chargeable gains less expenses of management, as allowed by ss.75 and 76 ICTA 1988. As Revell (decided in 1906) demonstrates, it is a charging basis of long-standing, although it received statutory recognition in s.65 Finance (No 2) Act 1992, and the “Crown Option” is now enshrined in Paragraph 84 Schedule 18 FA 1998.
The reason why it is usually to the Revenue's advantage to tax, not on a Case I basis, but on the I-E basis, demonstrates an important distinction between charging a life assurance business to tax as a single trade in accordance with the provisions applicable to Case I and taxing the company as an investment company. It is a distinction important to the instant appeal.
Expenses of management, deductible on the I-E basis, do not include the cost of claims paid to policyholders, nor do they include any actuarially calculated increase in liabilities to policyholders. Contrast the computation of the profits of a life assurance business under Case I. The trading profits are premium income plus investment income and gains from which are deducted claims, any increase in actuarially calculated liabilities and expenses of management. As the Lord President acknowledged in Scottish Union and Northern Assurance (q.v. supra 578), it is not possible to compute the profits without actuarial calculation.
The significant feature of a charge to tax on a Case I basis is that it is the profit which is available to the shareholders that is charged. The computation of profits on a Case I basis produces that proportion of the profits which is available to the shareholders. It excludes the profits which are allocated to meet liabilities to policyholders.
As I have indicated, this appeal is concerned with the right, or as the taxpayer would say, its duty to carry forward unused losses from previous years. It is important, therefore, to recall that there is no dispute but that were the taxpayer to be charged to tax under Case I, it would be under an obligation to deduct from its trading income the losses unused in previous years. S.393(1) ICTA 1988 provides:
‘393 Losses other than terminal losses
(1) Where in any accounting period a company carrying on a trade incurs a loss in the trade, the loss shall be set off for the purposes of corporation tax against any trading income from the trade in succeeding accounting periods; and (so long as the company continues to carry on the trade) its...
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