Sun Life Assurance Company of Canada (UK) Ltd v HM HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | A |
| Judgment Date | 20 January 2009 |
| Neutral Citation | [2009] EWHC 60 (Ch) |
| Date | 20 January 2009 |
| Court | Chancery Division |
| Docket Number | Case No: CH/2008/APP/0063 |
[2009] EWHC 60 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE SPECIAL COMMISSIONERS
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Patten
Case No: CH/2008/APP/0063
CH/2008/APP/0065
David Goldberg QC (instructed by Herbert Smith LLP) for the Appellant
David Ewart QC (instructed by Business and Property Taxes Team, Solicitor's Office, HM Revenue & Customs) for the Respondent
Hearing dates: 12 th to 14 th November 2008
Approved Judgment
THE HON MR JUSTICE PATTEN
The Hon Mr Justice Patten:
Introduction
Sun Life Assurance Company of Canada (UK) Limited (“Sun Life”) is a member of a UK group of companies. Following the demutualisation in 2000 of its Canadian parent, it succeeded to that company's life assurance business (which had been carried on by its parent's UK branch) under a scheme approved under Schedule 2C to the Insurance Companies Act 1982.
It carries on long-term insurance business including a basic life assurance and general annuity business (“BLAGAB”), a pension business and permanent health insurance but has been closed to new business since 2001.
The issue on this appeal is whether, as a company which carries on a BLAGAB, Sun Life is entitled, in respect of that business, to deduct unused losses in making its Case I computations of profit for the purposes of section 89 of the Finance Act 1989. This determines the amount to be deducted from the relevant profits (as defined) of the company for the accounting period in question so as to compute what is described in s.88(1) FA 1989 as the policy holders' share of the relevant profits for that period. The tax consequence is that the policy holders' share of the relevant profits bears tax at a rate equal to the basic rate of income tax for the year of assessment. The balance of the company's taxable profits from its BLAGAB or any other life assurance business is subject to the usual rate of corporation tax.
During the 1990s Sun Life incurred Case I losses largely due to the funding of guaranteed annuity rates. There was an agreed settlement with HMRC in respect of the years to 31 st December 2000 and 31 st December 2001 which involved Sun Life abandoning its claim to set unused trading losses against its Case I profits in these years for the purpose of calculating the policy holders' share of relevant profits under ss.88–89 FA 1989. But its revised returns for 2002 and 2003 were submitted on the basis that trading losses available for carried forward relief under s.393 ICTA 1988 fell to be deducted from its Case I profits for these years for the purposes of s.89. In respect of 2002 Sun Life had an agreed Case I profit from its BLAGAB before any set-off for unused losses of £8,534,030. For 2003 the figure is £95,465,960.
These appeals therefore relate to the accounting periods ending on 31 st December 2002 and 31 st December 2003, in respect of which the basic rate of income tax and the rate of corporation tax were 22% and 30% respectively. The Special Commissioner (Mr Julian Ghosh QC), in a decision released on 11 th December 2007, decided that the taxpayer company was entitled to deduct its unused losses in making the computation of Case I profits for the accounting period to 31 st December 2002 but that, as a result of amendments to s.89 introduced by the Finance Act 2003, the relief was not available in the period up to 31 st December 2003.
Sun Life appeals against his decision in respect of the 2003 accounting period and HMRC have cross-appealed his decision in respect of the period up to 31 st December 2002. It is accepted by Sun Life that if HMRC's cross-appeal succeeds then its own appeal against the Special Commissioner's decision on the FA 2003 amendments cannot succeed. This is because its appeal is based on the premise that in the 2002 accounting period relief for unused losses was available and that the amendments were not designed (or effective) to remove it. Minus that premise, the challenge to HMRC's rejection of the claim to deduct unused losses in respect of the 2003 accounting period becomes unsustainable.
The 2002 accounting period
In order properly to consider Sun Life's appeal it is necessary therefore to begin with the cross-appeal relating to the accounting period up to 31 st December 2002 and with s.89 in its unamended form. For that period ss.88 and 89 FA 1989 (so far as material) provided as follows:
“ 88 Corporation tax: policy holders' fraction of profits
(1) Subject to subsection (2) and section 88A below, in the case of a company carrying on life assurance business, the rate of corporation tax chargeable for any financial year on-
(a) the policy holders' share of the relevant profits for any accounting period, or
(b) where the business is mutual business, the whole of those profits,
shall be deemed to be the rate at which income tax at the basic rate is charged for the year of assessment which begins on 6th April in the financial year concerned.
(2) Subsection (1) above does not apply in relation to profits charged under Case I of Schedule D.
(3) For the purposes of subsection (1) above, the relevant profits of a company for an accounting period are the income and gains of the company's life assurance business reduced by the aggregate amount of
(aa) amounts falling in respect of any non-trading deficits on the company's loan relationships to be brought into account in that period in accordance with paragraph 4 of Schedule 11 to the Finance Act 1996
(a) expenses of management falling to be deducted under section 76 of the Taxes Act 1988, and
(b) charges on income,
so far as referable to the company's life assurance business.
89 Policy holders' share of profits
(1) The references in sections 88 and 88A above to the policy holders' share of the relevant profits for an accounting period of a company carrying on life assurance business or, as the case may be, basic life assurance and any general annuity business are references to the amount arrived at by deducting from those profits the Case I profits of the company for the period in respect of its life assurance business, reduced in accordance with subsection (2) below.
(2) For the purposes of subsection (1) above, the Case I profits for a period shall be reduced by—
(a) …
(b) the shareholders' share of any … franked investment income arising in the period which is referable to the company's basic life assurance and general annuity business…
(c) …
(2A) …
(3) For the purposes of this section “the shareholders' share” in relation to any income is so much of the income as is represented by the fraction
AB
where-
A is an amount equal to the Case I profits of the company for the period in question in respect of its life assurance business, and
B is an amount equal to the excess of the company's relevant non-premium income and relevant gains over its relevant expenses and relevant interest for the period.
(4) Where there is no such excess as is mentioned in subsection (3) above, or where the Case I profits are greater than any excess, the whole of the income shall be the shareholders' share; and (subject to that) where there are no Case I profits, none of the income shall be the shareholders' share.
(5) In subsection (3) above the references to the relevant non-premium income, relevant gains, relevant expenses and relevant interest of a company for an accounting period are references respectively to the following items as brought into account for the period, so far as referable to the company's life assurance business,—
(a) the company's investment income from the assets of its long-term insurance fund together with its other income, apart from premiums;
(b) any increase in the value (whether realised or not) of those assets;
(c) expenses payable by the company;
(d) interest payable by the company;
and if for any period there is a reduction in the value referred to in paragraph (b) above (as brought into account for the period), that reduction shall be taken into account as an expense of the period.
(6) Except in so far as regulations made by the Treasury otherwise provide, in this section “brought into account” means brought into account in the revenue account prepared for the purposes of Chapter 9 of the Prudential Sourcebook (Insurers), and where the company's period of account does not coincide with the accounting period, any reference to an amount brought into account for the accounting period is a reference to the corresponding amount brought into account for the period of account in which the accounting period is comprised, proportionately reduced to reflect the length of the accounting period as compared with the length of the period of account.
(7) In this section—
“Case I profits” means profits computed in accordance with the provisions of the Taxes Act 1988 applicable to Case I of Schedule D;
“the Prudential Sourcebook (Insurers)” means the Interim Prudential Sourcebook for Insurers made by the Financial Services Authority under the Finance Services and Markets Act 2000.”
As s.88(2) makes clear, the relevant profits of the BLAGAB which are apportioned in accordance with the provisions of s 89 are not those chargeable on a computation of trading profit made under Case I. Section 88 is directed to relevant profits as defined by s.88(3) which, for practical purposes, amount to its profits from investments held for the benefit of policy holders less expenses of management and the other allowable deductions there specified.
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