Spc00658

Profit, Notional Schedule D, Case 1 Computation, Life assurance taxation, Basic life assurance and general annuity business, Policy holder’s share

THE SPECIAL COMMISSIONERS

	SUN LIFE ASSURANCE COMPANY OF CANADA (UK) LTD	Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

		

				Special Commissioner:  JULIAN GHOSH QC

Sitting in public in London on Monday 30th April 2007

for the Appellant Mr D Milne QC

for the Respondents Mr D Ewart QC

© CROWN COPYRIGHT 2007

DECISION

1.	This appeal concerns the construction of the term “Case I profits” for the purposes of the Finance Act 1989, Section 89(1).  The appeal raises two issues for determination.  The first issue is whether, for accounting periods beginning before 1st January 2003, trading losses carried forward from previous years are taken into account in determining the “Case I profits of [a] company for the period in respect of its life assurance business” for FA 1989, Section 89(1) purposes.  The Appellant, Sun Life Assurance Company of Canada (UK) Limited (“SLOCUK”) says that such losses are taken into account.  The Respondents, Her Majesty’s Commissioners of Revenue and Customs (“HMRC”) says that they are not.
2.	The second issue concerns accounting periods beginning on or after 1st January 2003.  In relation to these accounting periods, the question is whether SLOCUK can only take into account losses incurred in (and carried forward from) accounting periods in which 31st December 2002 is included and later accounting periods.  SLOCUK says that they can carry forward such losses from earlier accounting periods.  HMRC says that provisions introduced into FA 2003 which amended FA 1989, Section 89, prevent this.
The Facts

3.	The facts in this appeal are not in dispute.
4.	SLOCUK was formed in July 1969 and is a member of a UK group of companies.
5.	In March 2000, following a demutualization of its Canadian parent, SLOCUK succeeded, under a scheme approved by the High Court under Schedule 2C to the Insurance Companies Act 1982, to the life assurance business previously carried on by the UK branch of the Canadian parent.  In addition, it also (under the same High Court approved Schedule 2C scheme) acquired the long term business of Confederation Life Insurance Company (UK) Limited (CLICUK).
6.	SLOCUK carries on the trade of long-term insurance including basic life assurance and general annuity business (“BLAGAB”), pension business (“PB”) and permanent health insurance (“PHI”) but has been closed to new business since February 2001.  In March 2002 it outsourced its back office administration functions to Marlborough Stirling Life and Pensions Limited (now Vertex Life and Pensions Limited).
7.	In the 1990s the Schedule D Case I computations for both CLICUK and SLOCUK resulted in losses.  The relevance of the Schedule D Case I computation for each accounting period is set out below.
8.	SLOCUK and HMRC reached an agreed settlement for the years 31 December 2000 and 31 December 2001 in December 2004.  As part of this settlement SLOCUK agreed to abandon its claim that any such unused Case I trading losses were available to be set against Case I profits calculated for the purposes of Section 89 of Finance Act 1989 for both of those years.  The agreed Case I trading losses at 31 December 2001 are £614,357,649.
9.	For the year ended 31 December 2002 SLOCUK has an agreed Case I profit before any claim to offset unused Case I losses of £8,534,030.  There are other outstanding enquiries for this year with HMRC.
10.	For the year ended 31 December 2003 SLOCUK has a Case I profit before any claim to offset unused Case I losses of £95,465,960 (subject to agreement with HMRC).
11.	SLOCUK submitted revised 2002 and 2003 corporation tax returns on 23 December 2005 on the basis that Case I trading losses are available under Section 393 Taxes Act 1988 to be brought forward from earlier years and set against the Case I profit for the years as calculated for the purposes of FA 1989, Section 89.
12.	The Law
SLOCUK’s taxable profit of its life assurance business is not computed on ordinary Schedule D, Case I principles.  Rather, for the purposes of corporation tax, SLOCUK’s taxable profit of its life assurance business is determined on what is known as the “I minus E” basis. On this basis the taxable profit for its BLAGAB is computed by reference to the company’s investment income plus chargeable gains with a deduction for management expenses as allowed under Section 76 Income and Corporation Taxes Act 1988.  The PB profits are assessed to tax under Case VI of Schedule D by reference to the appropriate part of the long term business surplus arising.  The taxable profit for its PHI is computed separately on a Case I basis and is determined largely by reference to the profit shown in the company’s financial statements.
13.	Although the taxable profits of a life assurance business are not computed on Schedule D Case I principles, in each period the company also prepares a tax computation for its life assurance business under Case I of Schedule D.  This calculation has three principal uses:
(i)	The first is to divide the company’s relevant profits into amounts charged to corporation tax at a rate equal to the lower rate of income tax (“the policyholders’ share”) and at the full rate of corporation tax (“the shareholder’s share”) as provided for by FA 1989, Sections 88 and 89.
(ii)	The second is that the Case I profit forms part of the calculation of the “shareholder’s share” of income for the purposes of Section 89(3) Finance Act 1989 (which is a distinct purpose from the determination of tax rates referred to immediately above).
(iii)	Finally, if the result for a particular accounting period is a Case I loss then this loss is available for relief, for example under the group relief provisions of Chapter IV of Part X of Income and Corporation Taxes Act 1988.
14.	SLOCUK’s trading profits, or losses, if any, would be computed on an entirely different basis (broadly, policy premiums and the return on investments [excluding dividends from UK resident companies: I ignore the application of TA 1988, section 95 which taxes such dividends in the hands of certain dealers] held to meet liabilities arising on the policies would be taken as Schedule D Case I receipts and a deduction from those receipts would be made for expenses and claims paid and for future liabilities to policyholders on an actuarial basis, to arrive at a Schedule D Case I profit or loss for a particular accounting period).  The Schedule D Case I computation may well produce a trading loss although the I minus E computation for the same accounting period might produce a profit.
15.	The First Issue: Accounting Periods Beginning Before 1 January 2003
This appeal concerns the taxation of SLOCUK’s BLAGAB profits.  As I mention above, this first issue poses the question whether the Case I profits as defined in FA 1989, Section 89(7) and as calculated for SLOCUK for the years ended 31 December 2002 and 31 December 2003 are to be reduced by its Case I losses of prior years, for the purposes of calculation of ‘profits of the company for the period’ in Section 89(1) FA 1989.

16.	FA 1989, Section 88 provides, insofar as material,
“(1)	Subject to sub-section (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 policyholders’ 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)	Sub-section (1) does not apply in relation to profits charged under Case I of Schedule D.
(3)	For the purposes of sub-section (i) 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)	chargeable income
so far as referable to the company’s life assurance business …”.
17.	Thus FA 1989, Section 88 subjects a life assurance company’s “relevant profits” (as defined in Section 89(3)), including its BLAGAB profits (see Section 88(3A)(a)), to two separate rates of corporation tax.  Analogous provisions which imposed a corporation tax at a rate equal to the lower rate of income tax on certain specified categories of income and gains within an insurance company’s BLAGAB were, prior to FA 2003, contained in Section 88A but these are not relevant to the appeal and I say no more about them.  The policyholders’ share of the relevant profits specified in Section 88 (along with any profits arising from mutual business) is subject to a lower rate of corporation tax (a rate equal to the basic rate of income tax).  The balance is subject to the full rate of corporation tax.  I shall refer exclusively to the application of Section 88 to SLOCUK’s BLAGAB’s profits since it is solely BLAGAB profits which are relevant in this appeal.  This bifurcation of profits between the policyholders’ share  and the balance is expressly (see Section 88(2)) disapplied for profits charged to Schedule D Case I rather than I-E.
18.	The mechanism to ascertain the policyholders’ share, subject to the lower corporation tax rate, specified in Section 88(1), is set out in Section 89, which provides as follows:-
“(1)	The references in Section 88 and Section 88A above to the policyholders’ share of the relevant profits for an accounting period of a company carrying on life assurance business or as to the case may be, basic life assurance and 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 sub-section (2) below.
(2)	For the purposes of sub-section (1) above, the Case I profits for a period shall be reduced by –
…
(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 …
…
(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 A/B
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 [defined in Section 89(5)] and relevant gains over its relevant expenses [also defined in Section 89(5)] and relevant interest for the period.
(4)	Where there is no such excess as is mentioned in sub-section (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.
…
(7)	In this section “Case I profits” means the profits computed in accordance with the provisions of the Taxes Act 1988 applicable to Case I of Schedule D.”
19.	Thus the scheme of FA 1988, Sections 88 and 89 was, pre FA 2003, as follows:
The draftsman distinguishes in the section 88/section 89 regime, for corporation tax purposes, amongst a life assurance company’s profits as follows:-
1.	Schedule D Case I profits, if such profits are actually subjected to a charge to Case I, rather than I-E: these are taxed in the same way as for any other company within the charge to corporation tax (see Section 88(2))
2.	Profits arising from mutual business, which were subject to corporation tax at a rate equal to the basic rate of income tax (which at the material time was and remains significantly lower than the full rate of corporation tax) (see Section 88(1)(b))
3.	The “policyholder’s share” of BLAGAB profits, which was also subject to corporation tax at a rate equal to the basic rate of income tax (Section 88(1)(a)); and
4.	The balance of BLAGAB profits, which was subject to corporation tax in under the normal rules, at the full rate of corporation tax.
20.	The bifurcation of BLAGAB profits in Section 88 between the policyholders’ share and the balance thus distinguishes between the policyholder’s share on the one hand and the balance on the other of a life assurance company’s “relevant profits” (the income [being, broadly investment income which would comprise income from one or more of the sources specified in Schedule A, Schedule D, Case II, IV or V or Schedule F] and gains of the company’s life assurance business: section 88(1)(a), (3)).  The terminology used by the draftsman in relation to “the policyholders’ share” in Section 88 and the favourable lower rate of corporation tax fixed on the policyholder’s share implies that the policyholder’s share for an accounting period is ascertained and given such favourable treatment on the basis that this part of the life assurance company’s BLAGAB profits is allocated to satisfy liabilities to policyholders, rather than representing profits which belong to shareholders.  And this favoured proportion, allocated to meet liabilities to policyholders, is ascertained by the mechanism in Section 89(1), which simply subtracts an amount equal to the life assurance company’s notional Case I profits for an accounting period (defined in section 89(7) as “the profits computed in accordance with the provisions of the Taxes Act 1988 applicable to Case I of Schedule D”) from its BLAGAB profits for that period.  I say “notional” because this figure which calculates a life assurance company’s Schedule D Case I profits for a particular accounting period is used only for the purpose of calculating the policyholders’ share of the life assurance company’s BLAGAB profits.  The amount so calculated is not, of course, subject to a charge under Schedule D Case I.  However, the use of the amount arrived at to make a further calculation (and my description of that amount as a notional Schedule Case I profit) does not mean that this amount is anything other than the amount which would have been the life company’s actual Schedule D, Case I profits, had the life company been taxed to Schedule D, Case I, rather than I-E.  
21.	The notional Schedule D Case I profits deducted from BLAGAB to ascertain the policyholders’ share of BLAGAB are themselves reduced (thus increasing the policyholders’ share) by an amount defined as “the shareholders’ share” of the company’s “franked investment income” referable to the company’s BLAGAB for the relevant accounting period: Section 89(2).  The “shareholders’ share of the relevant franked investment income” is defined in Section 89(3) as the “Case I profits of the company for the period in question” divided by the excess of the life assurance company’s “relevant non-premium income and relevant gains” over “relevant expenses” and “relevant interest” for the period.  Thus the construction of the phrase “Case I profits” is important not only to determine the amount to be deducted from BLAGAB profits under section 89(1) but also whether that amount is itself reduced by the application of section 89(3).  
22.	The terms used in section 89(3), “relevant non-premium income”, “relevant gains”, “relevant expenses” and “relevant interest” are all defined in section 89(5).  The excess of the life assurance company’s “relevant non-premium income and relevant gains” over “relevant expenses” and “relevant interest” for the period is essentially the excess of the company’s investment (and other non-premium) income over expenses and interest, adjusted by the net increases and decreases in the value (whether realised or not) of the assets of its long-term business fund.  If the life assurance company’s investment income and expenses, and the value of its long-term business and assets are such that there is no excess of relevant non-premium income and relevant gains over relevant expenses and relevant interest, or if the notional Schedule D Case I profit is greater than the excess, the whole of the franked investment income is treated as comprising the shareholders’ share.  In this case, the whole of the franked investment income is deducted from the notional Case I profits referred to in Section 89(1), thus increasing the life assurance company’s BLAGAB profits taxable at the lower rate of corporation tax applicable to the policyholders’ share.  On the other hand, if there are no [notional] Schedule D, Case I profits for the purposes of section 89(3) (because the notional Schedule D Case I computation produces a loss, or neither a profit nor a loss), no part of the franked investment income is treated as comprising the shareholders’ share of that franked investment income, so that none of the franked investment income is deducted from the Section 89(1) notional profit (which means, in turn, that there is no increase in the policyholders’ share of the life assurance company’s BLAGAB profits taxed at the lower rate of corporation tax): Section 89(4).  
23.	Very broadly, section 89(2) to (4) means that to the extent that brought forward losses of prior accounting periods reduce the notional Schedule D, Case I profits for Section 89(1) purposes (increasing the policyholders’ share of BLAGAB profits), those brought forward losses also have the effect of reducing the amount of franked investment income which can be deducted from the notional Schedule D, Case I profits and further increase the policyholders’ share of BLAGAB profits.  
24.	I note the terms of section 89(3) at this stage, as section 89(3) formed the basis of one of HMRC’s submissions as to why the notional Case I profit for section 89 purposes ignores brought forward losses of prior accounting periods (see below).  I should say that neither party suggested that the phrase “Case I profits” should be construed differently in section 89(1) and section 89(3).
25.	If brought forward losses computed on a Schedule D Case I basis informs the phrase “Case I profits”, the amount deducted from the relevant BLAGAB profits is reduced by the amount of the brought forward losses, meaning that the policyholders’ share of the relevant profits (which attracts the favourable lower rate of corporation tax) is increased.  If not, the shareholders’ share is increased and the policyholder’s share is correspondingly decreased.
SLOCUK’s Contentions
26.	Mr Milne QC, appearing for SLOCUK, said, shortly, that the phrase “Case I profits” in Section 89(1) takes brought forward losses of prior accounting periods into account, so that those profits are reduced by such brought forward losses.
27.	Mr Milne pointed to Section 89(7) which defines “Case I profits” to mean “profits computed in accordance with the provisions of the Taxes Act 1988 applicable to Case I of Schedule D”.  He further pointed to Section 393 of TA 1988 which provides as follows:-
“(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 trading income from the trade in any succeeding accounting period shall then be treated as reduced by the amount of the loss …”.
28.	Mr Milne said that a Section 393 loss carried forward reduced the profits of the following year and since Section 393 is a provision of the Taxes Act 1988 “in accordance with” which profits for the (current) year were to be computed for general purposes, the losses brought forward must be treated as reducing the “Case I profits” for Section 89 purposes also.  Mr Milne also submitted that section 393 reduced the actual Schedule D Case I profits of a company within the charge to corporation tax rather than reducing any notional amount.  It followed that since FA 1989, section 89(7) required the computation of what would be a life company’s actual corporation tax profits, albeit as a step to ascertaining the policyholders’ share of that company’s BLAGAB profits, section 393 must apply in computing the Schedule D, Case I profits for that purpose as much as if the Case I profits were being calculated to ascertain an actual charge to corporation tax under Schedule D, Case I.
29.	Mr Milne also pointed to Section 6(1) of the Taxes Act 1988.  Section 6(1) provides that “corporation tax shall be charged on profits of companies”, and Section 6(4)(a) provides that “profits” means “income and chargeable gains”, so that the result of the application of Section 393(1) to carry forward a trading loss to a subsequent accounting period is that the “trading income”, and therefore the “profits”, of a company for the subsequent accounting period are “treated as reduced by the amount of the loss”.
30.	Mr Milne further submitted that the ordinary and natural meaning of this deeming provision (that is Section 393(1)) is to treat it as reducing the “Case I profits” for Section 89(6) purposes and relied on Marshall v Kerr [1993] STC 360 (Court of Appeal) and [1994] STC 638 (House of Lords) in support of this proposition.
31.	Mr Milne also submitted that there was nothing in the history of Section 89 of FA 1989 or in practice, prior to the coming into effect of Section 89, which suggested that Case I losses should be treated differently for Section 89 purposes than for general corporation tax purposes.  Nor, said Mr Milne, was there anything in the history of the taxation of life companies which suggested that Case I losses should be treated differently for the purposes of Section 89 as they were generally.  Mr Milne submitted two thorough and carefully researched documents prepared for the purposes of the appeal by his Instructing Agents.  The first was entitled “History of Section 89 Finance Act 1989” and the second was entitled “Case I Losses of Life Insurance Companies”.  Mr Ewart QC, who appeared for HMRC, did not object to the submission of these documents.  However I should say that Mr Milne did not suggest that Section 89 was ambiguous in the sense which permitted an appeal to its legislative history and I have not referred to the legislative history of FA 1989, section 89 or to either of these documents concerning the history of taxation of life assurance companies more generally in reaching my decision.
HMRC’s Contentions
32.	Mr Ewart QC, on behalf of HMRC, rejected the proposition that the “Case I profits” in Section 89(1) were reduced by brought forward losses of prior accounting periods.
33.	Firstly, Mr Ewart submitted that the natural meaning of the phrase “Case I profits of the company for the [accounting] period” cannot include elements (such as losses) which have accrued in earlier periods.
34.	Secondly, Mr Ewart submitted that the technical meaning of the words “Case I profits” were the revenue of a taxpayer for an accounting period less his expenses of that period and by implication excluded brought forward losses of prior accounting periods.  Mr Ewart relied on Taylor v MEPC Holdings Limited [2004] STC 123.
35.	So far as Section 393(1) of TA 1988 was concerned, Mr Ewart submitted that this provision only operated for the purposes of computing the corporation tax which is to be charged on the trading income of the company in question.  That trading income is “treated” as reduced by the amount of the loss for that purpose.  It is not so treated for any other purpose.  This said Mr Ewart, was analogous to the approach of the Court of Appeal in Bricom Holdings Ltd v IRC [1997] STC 1179 at 1194 (per Millet LJ as he was then), where the Court of Appeal held that the phrase “amount equal to corporation tax” was not itself corporation tax (and thus outside the protection of the UK-Netherlands Double Tax Treaty which was restricted in its scope to “corporation tax”).
36.	Mr Ewart further submitted that his construction of Section 89, which ignored accrued losses of prior accounting periods, was consistent with the purpose of Section 89 which was to apportion the profits of a particular accounting period between policyholders and shareholders.  Corporation tax, said Mr Ewart, was an annual tax.  It was not appropriate to carry out an apportionment of BLAGAB profits for a particular accounting period, said Mr Ewart, by reference, even in part, to the results of prior accounting periods.  This was, said Mr Ewart, because the purpose of Section 89 was to ascertain the proportion of the BLAGAB in a particular accounting period which was allocated to policyholders (in the sense of being allocated to meet liabilities to those policyholders).  This was properly done without any reference to prior years’ brought forward losses.  Say in an accounting period, said Mr Ewart, the Life assurance company’s notional “Case I profits” calculated under FA 1989, section 89, actually amounted to a loss.  This meant that the whole of BLAGAB for that period was properly viewed as allocated to policyholders and attracted the lower corporation tax rate which applied to the policyholders’ share.  The work to be done by the calculation of the notional Case I profits was thus exhausted.  In the following year the proportion of that following years’ BLAGAB to be allocated to policyholders will have to be calculated again by reference to a new Schedule D, Case I calculation of that subsequent accounting period’s profits.  But any prior years’ notional Case I losses were irrelevant.
37.	Finally, Mr Ewart submitted (obviously correctly) that the concept of the “Case I profits of the company for the [accounting] period in question” was also used in Section 89(3).  That formula was used, said Mr Ewart, inter alia, to determine the shareholders’ share of any franked investment income arising in the period (see Section 89(2)(b)).  It did not make sense, according to him, for losses of a prior accounting period to be taken into account in carrying out that apportionment.
38.	An agreed illustration was provided of the respective positions of SLOCUK and HMRC, with a comparison to a general Case I trader, which I reproduce as an Appendix to this Decision.  Put shortly, on SLOCUK’s view, a life assurance company’s BLAGAB profits are reduced by trading losses, whether those losses occur in the current period (when they were deductible on any view) or are carried forward from prior accounting periods.  On HMRC’s view, a loss of a prior accounting period would, quite simply, never be deducted from the Case I profits of a succeeding period for Section 89(1) purposes.
Accounting Periods Beginning before 1 January 2003
39.	I consider SLOCUK’s conclusion (that the Case I profits are reduced by brought forward losses) to be correct.  Section 393(1) applies to reduce SLOCUK’s Case I profits “for the purposes of corporation tax”.  Section 393(1) does this by reducing any “trading income” (that is trading receipts) of succeeding accounting periods (see section 393(8) which defines “trading income” as “the income which falls or which would fall to be included to be included in respect of the trade in the total profits of the company”), so that section 393(1) can only operate to reduce a potential trading profit to nil, not to create a loss in a succeeding accounting period).  The “purposes” of corporation tax for which section 393(1) applies include the imposition of the rate (or of different rates) of corporation tax on a particular category of the profits of a company within the corporation tax charge.  The FA 1989, section 88/section 89 regime applies to determine the rate of corporation tax applicable to a life assurance company’s BLAGAB profits for a particular accounting period.  Thus the FA 1989, section 88/section 89 regime fructifies one of the purposes of the corporation tax regime in general.  And Section 89(7), even in its pre-FA 2003 form,  requires those Case I profits to be computed by reference to brought forward losses.
40.	So far as the language of the relevant statutory provisions are concerned, this is firmly in favour of SLOCUK’s contentions.  The FA 1989, Section 88/Section 89 regime clearly apply for the purposes of corporation tax (to fix a particular corporation tax rate on the policyholders’ share of BLAGAB profits).  Section 89(7) requires the notional Schedule D, Case I profits to be calculated “in accordance with the provisions of the Taxes Act 1988”, of which “provisions” section 393 is self-evidently one.  Thus as a simple matter of statutory construction, section 393 must apply to reduce the profits of a particular accounting period by the brought forward losses of prior years, for the purposes of FA 1989, section 89(1).  While of course the calculation of these Schedule D, Case I profits is a step to make a further calculation (the policyholders’ share of the BLAGAB profits for the accounting period in question), nothing in the terms of section 89(7) requires that the Schedule D, Case I profits be calculated any differently from how they would be calculated for the purpose of calculating profits actually charged to Schedule D, Case I.  Quite the opposite.  The Schedule D, Case I profits are to be calculated “in accordance with the provisions of the Taxes Act 1988…”.  These “provisions” include section 393.  Put another way, the terms of FA 1989, section 89(7) are clear that the computation of Schedule D, Case I profits for the purpose of ascertaining the policyholders’ share of BLAGAB profits is exactly the same computation which would be made to calculate a charge to corporation tax to Schedule D, Case I. 
41.	I should say something about the nature of section 393 as a deeming provision as submissions were made by both parties.  Section 393 could, I suppose, be viewed as a deeming provision which adjusts reality by “treating” profits of an accounting period as reduced by brought forward losses (see the reference to “treated as” in section 393(1)).  The deeming nature of section 393 arises, it could be said, from the annual nature of corporation tax, so that the profits of a particular accounting period can only ever be “deemed” to be (and never actually be) reduced by brought forward losses of prior accounting periods.  If so, it seems to me clear that the deeming holds good in the absence of absurdity, in line with the approach taken in Marshall v Kerr.  As I make clear below, the application of section 393 for the purposes is perfectly consistent with principle and not at all absurd.  But even if section 393 is not a deeming provision which adjusts reality on a counterfactual basis but rather (and more simply) computational provision which computes the Schedule D, Case I profits for a particular accounting period by making an adjustment for brought forward losses of prior accounting periods, the approach (and here the answer) would be the same.  The current accounting period’s profits are computed and then mandatorily adjusted for brought forward losses of prior accounting periods (see the reference to “shall” in section 393(1)) to arrive at a final computed profit for the current accounting period.  Only if the computational adjustment produces an absurdity may violence be done to the plain words of the relevant provisions (here FA 1989, Section 89(7) and TA 1988, Section 393).  I make this observation of this perhaps sterile distinction between the application of a deeming provision and the purposive construction of a computational provision simply because it highlights the real question, that is whether notions of absurdity mean that the plain words of a statutory provision should be done violence to.  Often the reference to the extent (and limit) of the application of a deeming provision distracts from this simpler question.  But I repeat that whichever category Section 393 falls into, a deeming provision or a computational provision, in this case the answer is the same.  The plain words of Section 393, in the light of FA 1989, Section 89(7), require that a current accounting period’s profits, computed under Case I principles, are adjusted by the losses of prior accounting periods.  And for the reasons I give below, to my mind no absurdity arises by this adjustment. 
42.	I now explain why my conclusion, far from producing absurdity, accords with principle.  I accept Mr Ewart’s submission that the purpose of ascertaining the “Case I profit” in Section 89(1) is to compute the policyholders’ share in order to determine the proportion of the profits determined by the I minus E basis which are subject to the rate equal to the basic rate of income tax, rather than the (higher) corporation tax rate (in relation to profits which are not the result of mutual trading). 
43.	And furthermore, of course it is clear as a matter of principle and of authority that Section 393(1) is a relieving provision rather than a provision which actually strikes the profits of a trading company for an accounting period.  As a matter of principle, the profits of a company on an accounting period are, as Mr Ewart has pointed out, the revenue less expenses of a particular accounting period.  That is the essence of the notion of “profits” in relation to an annual tax.  As a matter of authority, this has been expressly recognised by the House of Lords in Taylor v MEPC Holdings Limited:
“The fact that [corporation tax] is computed annually means that a special provision is needed by way of relief to enable the trading loss in one year to be set off against profits of a subsequent year: see Section 393 of the 1983 Act … The mechanism by which relief is given … may simply be a deduction from the overall tax which would otherwise be payable … or (as in the case of trading loss relief) it may be a deduction from the profits from a particular source, namely the same trade in a subsequent year … Whatever the mechanism by which a relief is given, it is to be distinguished from deductions which fall to be made in computing the primary liability under the schedules.  For example the trading profits which are charged as income under Schedule D Case I are the revenue less the expenses.” (per Lord Hoffmann, paragraphs 12-14).
44.	But the nature of corporation tax as an annual tax is not the end of the matter.  Section 393(1), albeit in its capacity as a relieving provision, treats the receipts of a succeeding accounting period as reduced by a loss incurred in a prior accounting period, so that the profit is also treated as thereby reduced for corporation tax purposes (including the determination of the rate of corporation tax to be levied).  In relation to BLAGAB profits for a particular accounting period, FA 1989, section 89(1), computes the amount of BLAGAB profits allocated to meet liabilities of the life assurance company to policyholders for the purpose of fixing a favourable rate of computation tax on that proposition.  But this is done by arriving at the surplus of BLAGAB profits over Case I profits i.e. a surplus of BLAGAB profits on the one hand over Case I receipts less Case I expenses on the other.
45.	Put another way, the draftsman equates the amount of a life assurance company’s BLAGAB profits available for shareholders (not needed to meet liabilities to policyholders) to an amount equal to the Schedule D, Case I (notional) profits of the life assurance company for that accounting period.  Incidentally, I do not call  this latter amount available to shareholders “the shareholders share” of BLAGAB profits as this is a term of art used in section 89(2)(b), (3) and (6).  But the point is tolerably clear.  The draftsman distinguishes between the portion of a life assurance company’s BLAGAB profits allocated to meet policyholders liabilities on the one hand and the amount available to shareholders on the other.  And this latter amount is equated to an amount equal to what would have been the profits of the life assurance company had it made a computation for Schedule D, Case I purposes.  There is no third category of BLAGAB profits relevant to the draftsman of FA 1989, section 88 and section 89.  And in the context of a regime which equates a life assurance company’s notional Schedule D, Case I profits to the amount available to its shareholders (in order to calculate the proportion of its BLAGAB profits allocated to its policyholders), the amount of a life assurance company’s profits available to its shareholders is as equally affected by brought forward losses as current year losses.  The receipts of the current accounting period available to shareholders is reduced not only by the expenses of the current accounting period but also the expenses of prior accounting periods.  This is what is recognised by section 393(1).  The receipts of a current accounting period cannot be said to be available to shareholders until those receipts exceed the expenses of the current and prior accounting periods.  Thus the calculation of a current accounting period’s profits by reference to the losses of prior accounting periods makes perfect sense in the context of using the profits, once calculated, to ascertain the amount of BLAGAB profits available to shareholders (and thereby determine the amount of BLAGAB profits allocated to meet liabilities to policyholders).  This is the case whether section 393 is a deeming provision or a mere computational provision.  Section 393 can be applied on its terms in the context of FA 1989, section 89 without any absurdity.
46.	And neither do I see any anomaly in brought forward losses of prior accounting periods informing the numerator in Section 89(3).  I have already observed above that if brought forward losses inform the calculation of the notional Schedule D, Case I profits for Section 89(1) purposes (so as to increase the policyholders’ share of BLAGAB profits), those brought forward losses also have the effect of reducing the proportion of franked investment income arising in the relevant accounting period which would otherwise further increase the policyholders’ share of BLAGAB’s profits.  The draftsman appears to consider that a proportion of the franked investment income received by a life assurance company is properly allocated to policyholders (and thus properly taxed at the lower rate of corporation tax).  Thus the policyholders’ share of franked investment income does not attract the same corporation tax reliefs as the part of franked investment income available to shareholders.  So the policyholder’s share of BLAGAB profits cannot be reduced by group relief or loss relief (TA 1988, section 434A(3)(a)) and, prior to the enactment of FA 1998, the policyholders’ share of BLAGAB profits could not be used to frank dividends paid (TA 1988, section 434(3), (6A)).  Neither could Advance Corporation Tax (“ACT”) paid on dividends made by a life assurance company have, prior to FA 1998, been set against corporation tax on the policyholders’ share: TA 1988, section 434(6), (6A). The restriction of the use of franked investment income to frank onward dividends and on the use of ACT became irrelevant after the abolition of ACT; section 434(3) and (6) were repealed by FA 1998.  The restriction on group relief for losses remains.  I make these observations on the terms of section 89(3) and the scheme of TA 1988 with some hesitancy since I was not addressed on these points and I have sought to glean an intelligible policy reason for its terms from the scheme of TA 1988.    
47.	It is, I confess, slightly odd that the proportion of franked investment income which the draftsman of section 89(3) seems to consider is properly allocated to policyholders is defined in turn, in section 89(3), as a fraction of the notional Case I profit which the draftsman considers is the part of BLAGAB profits available to shareholders in section 89(1).  Be that as it may, in any event (and quite independently of my thoughts as to the rationale of section 89(3)), what is clear is that the favourable treatment given to the shareholders’ share of franked investment income in section 89(3) (increasing the policyholders’ share of BLAGAB profits) is predicated on the life assurance company having [notional] Case I profits which exceed the company’s relevant non-premium income and gains [net of relevant expenses and relevant interest].  So the draftsman of section 89(3) equates the shareholder’s share of franked investment income with notional Case I profits in the same way as he does in section 89(1).  And the franked investment income cannot be said to be available to shareholders until prior years’ losses (the excess of expenses over receipts) have been exhausted any more than any other Schedule D, Case I receipt (say rent, interest from gilts, or income from other investments, say shares and securities of non UK resident companies).  So it is no more absurd (and every bit as sensible) to inform the notion of Schedule D, Case I profits with the brought forward losses of prior accounting periods, to ascertain the favourable proportion of franked investment income in section 89(3), as it is in the case of ascertaining the policyholders’ share of BLAGAB profits in relation to other income in section 89(1).
48.	I make one final point.  Parliament clearly (now) approves of brought forward losses of prior accounting periods adjusting the profits of current accounting periods for FA 1989 purposes in principle for both Section 89(1) and Section 89(3) purposes.  The legislative changes made in FA 2003 (see below) expressly provide for such an adjustment which reveals that in 2003, at least, Parliament considered that it was proper to inform the calculation of the amount of BLAGAB profits available to shareholders (and thereby the amount allocated to meet liabilities to policyholders) by reference to the losses of prior accounting periods.  Neither party sought to make any submissions on the construction of FA 1989, section 89, in relation to the pre 2003 accounting periods by reference to the FA 2003 changes.  I make this observation in case this matter goes further and one or other party wishes to make submissions on whether this case is an appropriate one in which to construe FA 1989, section 89 by reference to the subsequent legislation enacted in FA 2003.  But I do not myself rely on this observation in reaching my conclusion that TA 1988, section 393 applies in the context of FA 1989, section 89(1).  I repeat that my conclusion here is based on the plain words of the relevant provisions and my observations that the application of those words is consistent with principle.     
Issue 2: Accounting Periods beginning on or after 1st January 2003
The FA 2003 Changes
49.	Section 89 was amended by FA 2003, which expressly allowed certain brought forward losses to be taken into account in computing the Case I profits for Section 89(1) purposes.  The amendment was effected by FA 2003, Schedule 33 paragraph 7 which provided:-
“(1)	In Section 89(7) of the Finance Act 1989 … in the definition of “Case I Profits”, insert at the end “and adjusted in respect of losses in accordance with Section 76(2C) and (2D) of the Taxes Act 1988.
 (2)	Sub-paragraph (1) has effect for accounting periods beginning on or after 1st January 2003.
(3)	But Section 76(2C) of the Taxes Act 1988, as it applies by virtue of sub-paragraph (1), has effect as if the references in it to the amount which would fall, in the case of a company, to be set off under Section 393 of that Act but only to so much of that amount as is attributable to losses incurred in the accounting period of the company in which 31st December 2002 is included or any later accounting period.”
50.	At the material times, the Taxes Act 1988 Section 76(2C) and (2D) provided:
“(2C)	The adjustment in respect of losses that are to be made for any accounting period under paragraph (a) of sub-section (2A) is a deduction of the amount equal to the unused part of the sum which –
(a)	by reference to the computations made in respect of the company’s life assurance business in accordance with the provisions applicable to Case I of Schedule D, and
(b)	disregarding Section 434A(ii),
would fall, in the case of the company, to be set off under Section 393 against the company’s income for that period.
(2D)	For the purposes of sub-section (2C) above, an amount is unused to the extent that it is not being taken into account for any previous accounting periods in determining the amount by reference to which the following question was answered, namely, the question whether, and by how much, the amount deductible by virtue of this section by way of management expenses was less than the basic deduction.”
51.	Mr Milne, for SLOCUK, argued that the amendment effected by FA 2003 could not, on any view, be used as an aid to the construction of the pre-FA 2003 version of Section 89(1).  I do not understand Mr Ewart to quarrel with that proposition.
52.	Mr Milne further argued, however, that, despite the adjustment to Section 89(7) by Schedule 33, paragraph 7(1) of FA 2003, the losses incurred by SLOCUK in the accounting periods beginning before 1st January 2003 can be taken into account for accounting periods beginning on or after 1st January 2003.
53.	Mr Milne submitted that Parliament frequently enacts legislation which clarifies, rather than changes, previous legislation.
54.	Mr Milne additionally submitted that it “not infrequently” happens that HMRC suggests legislative changes to Parliament which turn out to be unnecessary, or, alternatively, to be based on a misunderstanding of what the previous law was.
55.	Mr Milne also submitted that it is clear that Parliament desires brought forward losses to reduce Section 89, Case I profits.
56.	The essence of Mr Milne’s argument is that his analysis that Case I profits are automatically reduced by brought forward losses by reason of Section 393 holds good for accounting periods beginning on or after 1st January 2003.  The amendment to Section 89(7) does not alter this.  The amendments to Section 89(7) were based on a misconstruction of the relationship between the term “Case I profits” in Section 89(1) and Section 393.  Thus, put shortly, nothing changed with the introduction of FA 2003.
57.	In reply Mr Ewart pointed to the clear words of FA 2003, Schedule 33, paragraph 7(3).  Mr Ewart said that paragraph 7(3) made it clear that only post 2003 losses could feature in the adjustment.
58.	I agree with Mr Ewart.  Paragraph 7(1) and 7(3) were introduced together on the mistaken assumption that express provision was required to adjust the current year Schedule D, Case I profits by the brought forward losses of prior accounting periods.  So Paragraph 7(1) has no practical effect.  To this extent Mr Milne is correct (that brought forward losses of prior accounting periods informed the computation of a life company’s Schedule D, Case I profits even without the express provision set out in paragraph 7(1)).   But paragraph 7(3) makes it clear that only post 2001 losses can be so brought forward.  The mistaken assumption of the draftsman of paragraph 7 as a whole (and paragraph 7(1) in particular) that express provision was required to account for brought forward losses at all does not affect the application of the restriction in paragraph 7(3).  The (in my view) mistaken assumption in paragraph 7(1) that express provision was required to account for the brought forward losses of prior accounting periods for FA 1989, section 89 purposes, does not inform the conditions for the application of the restrictions in paragraph 7(3) which restrict the brought forward losses so accounted for to post 2003 losses.  Paragraph 7(3) can be applied on its terms despite the mistaken assumption which underpinned paragraph 7 as a whole.  I dismiss the appeal in relation to the accounting periods beginning on or after 1 January 2003.
Decision
59.	I allow the appeal in relation to accounting periods beginning before 1 January 2003.
I dismiss the appeal in relation to accounting periods beginning on or after 1 January 2003.

JULIAN GHOSH QC
SPECIAL COMMISSIONER

RELEASED: 11 December 2007

SC 3180/2006