A special commissioner decided that the plain words of ICTA 1988, s. 393, in the light of FA 1989, s. 89(7), required that a current accounting period's profits, computed under Sch. D, Case I principles, were adjusted by the losses of prior accounting periods. The Finance Act 2003, Sch. 33, para. 7 expressly allowed certain brought forward losses to be taken into account in computing the Case I profits for s. 89(1) purposes but para. 7(3) made it clear that only post-2003 losses could feature in the adjustment.

Facts

The taxpayer was formed in July 1969 and was a member of a UK group of companies. In March 2000, following a demutualisation of its Canadian parent, the taxpayer succeeded, under a scheme approved by the High Court under Sch. 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 acquired the long-term business of Confederation Life Insurance Company (UK) Ltd (CLICUK).

The taxpayer carried on the trade of long-term insurance including basic life assurance and general annuity business (BLAGAB), pension business (PB) andpermanent health insurance (PHI) but had been closed to new business since February 2001. In March 2002 it outsourced its back office administration functions to V and P. In the 1990s the Sch. D, Case I computations for both the taxpayer and CLICUK resulted in losses.

The taxpayer and the Revenue reached an agreed settlement for the years 31 December 2000 and 31 December 2001 in December 2004. As part of that settlement the taxpayer 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 FA 1989, s. 89 for both of those years. The agreed Case I trading losses at 31 December 2001 were £614,357,649. For the year ended 31 December 2002 the taxpayer had an agreed Case I profit before any claim to offset unused Case I losses of £8,534,030. There were other outstanding enquiries for that year with the Revenue. For the year ended 31 December 2003 the taxpayer had a Case I profit before any claim to offset unused Case I losses of £95,465,960 (subject to agreement with the Revenue).

The taxpayer submitted revised 2002 and 2003 corporation tax returns on 23 December 2005 on the basis that Case I trading losses were available under ICTA 1988, s. 393 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, s. 89. The taxpayer appealed against a subsequent assessment to corporation tax. It took the view that a life assurance company's BLAGAB profits were reduced by trading losses, whether those losses occurred in the current period or were carried forward from prior accounting periods. On the Revenue'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 s. 89(1) purposes.

Issues

Whether, for accounting periods beginning before 1 January 2003, trading losses carried forward from previous years were to be taken into account in determining the Sch. D, Case I profits of the taxpayer company for the period in respect of its life assurance business for purposes of FA 1989, s. 89(1); and whether, for accounting periods beginning on or after 1 January 2003, the taxpayer could only take into account losses incurred in (and carried forward from) accounting periods in which 31 December 2002 was included and later accounting periods.

Decision

The special commissioner (Julian Ghosh QC) (allowing the appeal in part) said that the phrase ‘Case I profits’ in s. 89(1) took brought forward losses of prior accounting periods into account, so that those profits were reduced by such brought forward losses.

Section 393(1) applied to reduce the taxpayer's Case I profits for the purposes of corporation tax by reducing any trading receipts of succeeding accounting periods so that s. 393(1) could only operate to reduce apotential trading profit to nil, not to create a loss in a succeeding accounting period. The purposes of corporation tax for which s. 393(1) applied 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, s. 88/89 regime applied to determine the rate of corporation tax applicable to a life assurance company's BLAGAB profits for a particular accounting period. Thus it fructified one of the purposes of the corporation tax regime in general.

Section 89(7) required those Case I profits to be computed by reference to brought forward losses.

Moreover, the regime clearly applied for the purposes of corporation tax to fix a particular corporation tax rate on the policyholders’ share of BLAGAB profits.

Thus as a simple matter of statutory construction, s. 393 had to apply to reduce the profits of a particular accounting period by the brought forward losses of prior years, for the purposes of FA 1989, s. 89(1).

While the calculation of those Sch. D, Case I profits was 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 s. 89(7) required that the Sch. D, Case I profits be calculated any differently from how they would be calculated for the purpose of calculating profits actually charged to Sch. D, Case I. The Sch. D, Case I profits were to be calculated in accordance with the provisions of ICTA 1988, including s. 393.

Section 393 could be viewed as a deeming provision which adjusted reality by treating profits of an accounting period as reduced by brought forward losses. The deeming nature of s. 393 arose from the annual nature of corporation tax, so that the profits of a particular accounting period could only ever be deemed to be reduced by brought forward losses of prior accounting periods. The current accounting period's profits were computed and then mandatorily adjusted for brought forward losses of prior accounting periods to arrive at a final computed profit for the current accounting period. Only if the computational adjustment produced an absurdity might violence be done to the plain words of FA 1989, s. 89(7) and ICTA 1988, s. 393.

Section 89 was amended by FA 2003, Sch. 33, para. 7 expressly to allow certain brought forward losses to be taken into account in computing the Case I profits for s. 89(1) purposes. Paragraph 7(3) made it clear that only post-2003 losses could feature in the adjustment.

Paragraph 7(1) and 7(3) were introduced together on the mistaken assumption that express provision was required to adjust the current year Sch. D, Case I profits by the brought forward losses of prior accounting periods. So para. 7(1) had no practical effect but para. 7(3) made it clear that only post-2003 losses could be so brought forward. The mistaken assumption of the draftsman of para. 7 as a whole (and para. 7(1) in particular) that express provision was required to account for brought forward losses at all did not affect the application of the restriction in para. 7(3).

The mistaken assumption in para. 7(1) that express provision was required to account for the brought forward losses of prior accounting periods for FA 1989, s. 89 purposes, did not inform the conditions for the application of the restrictions in para. 7(3) which restricted the brought forward losses so accounted for to post-2003 losses. Paragraph 7(3) could be applied on its terms despite the mistaken assumption which underpinned para. 7 as a whole. Accordingly, the appeal would be allowed in relation to accounting periods beginning before 1 January 2003 but dismissed in relation to accounting periods beginning on or after 1 January 2003.

(2007) Sp C 658.

Decision released 11 December 2007.