Peterson v De Brunner (Inspector of Taxes) Special Commisioner's Decision [1996] STC (SCD) 91 HEARING-DATES: 6, 7, 8 September, 19 December 1995 19 December 1995 CATCHWORDS: Loss relief - Loss in any trade, profession, employment or vocation - Further relief for losses in early years of trade - Lloyd's underwriter - Issue by Revenue of certificate of amount of loss resulting in payment from special reserve fund to premiums trust fund on account of losses - Deemed income - Whether issue of certificate mandatory - Whether losses to be set-off first against deemed income - Income and Corporation Taxes Act 1988, ss 453, 454(4). HEADNOTE: The taxpayer sustained a loss as a Lloyd's underwriter on the 1989 account in his fourth year of trading, which corresponded to the year 1989-90. Following the issue of a certificate by the inspector under s 453 of the Income and Corporation Taxes Act 1988 (the 1988 Act) that the taxpayer had sustained a loss in his business for an underwriting year, a net payment corresponding to the gross amount of the taxpayer's loss was made into his premiums trust fund out of the capital of his special reserve fund. That payment was deemed for all income tax purposes to be an annual payment chargeable to income tax by deduction and paid out of profits and gains brought into charge to income tax. Further, s 454(4) of the 1988 Act provided that, where such a payment was made by reason that the underwriter had sustained a loss, relief in respect of the loss would, so far as possible, be given by treating the loss as reducing the income represented by the payment. The taxpayer claimed that he was entitled to carry the whole of the 1989-90 loss back to 1986-87 under s 381 of the 1988 Act without first setting it against the deemed income in respect of the payment into his premiums trust fund. The inspector decided that s 454(4) required that relief in respect of the 1989-90 loss should first be given against the deemed income. The taxpayer appealed against the inspector's decision, contending, inter alia: (1) that the inspector was not obliged to issue a certificate under s 453 and that, since the taxpayer had elected to carry back his loss under s 381, no loss remained to be certified under s 453; and, alternatively, (2) that the taxpayer was entitled to dictate the order of his tax relief, and that s 454(4) did not exclude such an election because (a) it was implicit in that subsection that the loss might be less than the deemed income and that could only be the case if the loss had been first allowed in part under another provision, (b) s 454(4) was silent as to the priority in giving relief, and (c) the word 'shall' in s 454(4) was not mandatory. Held - (1) If a loss had been sustained in an underwriter's business, it was implicit in s 453 that a certificate would be issued and that the inspector would be under a duty to do so, especially since there was no statutory guidance as to how he was to exercise a discretion. The taxpayer's election to claim relief under s 381 could not alter the fact that the computation for the purposes of s 453 showed a loss. The inspector was accordingly correct in issuing the certificate. (2) The intention of s 454(4), considered as a whole and in the light of its legislative history, was to provide that loss relief should be given first, to the extent that it was possible, against the deemed income without the need for a claim. In spite of its imprecise wording s 454(4) accordingly required the loss to be reduced to the extent that it was possible from the deemed income in priority to its use for any other loss relief, the relief being given without the need for a claim. Butt (Inspector of Taxes) v Haxby [1983] STC 239 distinguished. The taxpayer's appeal would therefore be dismissed. NOTES: For set-off of Lloyd's underwriters' losses against withdrawals from old style special reserve funds, see Simon's Direct Tax Service E5.643. For the Income and Corporation Taxes Act 1988, ss 453, 454(4), see ibid, Part G1. Sections 453 and 454 of the Income and Corporation Taxes Act 1988 were repealed by the Finance Act 1993, Sch 23, Part III (12) with effect for the year 1992-93 and subsequent years of assessment. CASES-REF-TO: Butt (Inspector of Taxes) v Haxby [1983] STC 239, 56 TC 547. Elliss (Inspector of Taxes) v BP Oil Northern Ireland Refinery Ltd [1985] STC 722; affd [1987] STC 52, 59 TC 474, CA. COUNSEL: The taxpayer appeared in person; Alun Williams, of the Inland Revenue Solicitor's Office, for the Crown. PANEL: SPECIAL COMMISSIONERS: THEODORE WALLACE AND MALCOLM J F PALMER JUDGMENTBY-1: DECISION JUDGMENT-1: DECISION: 1. This appeal concerns a claim for relief under s 381 of the Income and Corporation Taxes Act 1988 (the 1988 Act) in respect of losses sustained by a Lloyd's underwriter in his fourth year of trading, 1989, which corresponded to 1989-90. 2. Having made profits in the 1986 and 1987 accounts, Mr Peterson (the taxpayer) made transfers into a special reserve fund thereby reducing his liability to higher rate tax for 1986-87 and 1987-88, the years to which 1986 and 1987 corresponded. He sustained a loss on the 1989 account. Following the issue of a notice LL31 by the inspector under s 453(4) in respect of the 1989 loss of £18,799 gross followed by a certificate LL32(Z) a net payment of £10,080 (at book value) was made out of the taxpayer's special reserve fund, that being the capital held in the special reserve fund. 3. The taxpayer claimed that he was entitled to carry the whole of the 1989-90 loss back to 1986-87 under s 381 without first setting it against any deemed income in respect of the special reserve fund withdrawal. He relied on s 835(4) as well as s 381. 4. The inspector decided that the loss carried back should be reduced to the excess over the deemed special reserve fund withdrawal on the footing that s 454(4) required that relief in respect of the 1989-90 loss should first be given against the deemed special reserve fund withdrawal. 5. The question for determination was notified to the Special Commissioners by Mr Williams as follows: 'Whether underwriting losses, incurred as a member of Lloyd's certified under s 453(1) of the 1988 Act fall to be relieved initially under s 454(3) and (4), and only to the extent not so relieved, under s 381, or whether relief may be given under s 381 at the election of the taxpayer.' 6. The taxpayer submitted that a secondary question was implicit in the above issue, namely: 'If s 381 relief may be given at the election of taxpayer before applying the provisions of s 454(3) and (4) what is the amount of the loss which should be certified by the Revenue for the purposes of ss 453 and 454?' 7. During the hearing, however, it became apparent that the taxpayer was contending that the certificate under s 453(1) should not have been issued at all. He had in fact written to the inspector's predecessor on 15 July 1993 stating, inter alia: 'It therefore seems to me inappropriate for your certificates LL31 and LL32 to issue'. Mr Williams contended that the taxpayer had not appealed under s 453(4)(b) within the 30-day period specified, the intention to certify having been dated 7 June 1993. We indicated that this would be an appropriate case for leave to appeal out of time. The taxpayer however contended that it was not in fact out of time submitting that his letter of 15 July was within 30 days of the time when the notice would have been delivered to him in New Zealand in the ordinary course of post (see s 7 of the Interpretation Act 1978). He also said that the notice had not been sent to the address which he had asked to be used. Having considered the evidence before us, we ruled that the taxpayer had appealed within time. 8. This aspect of the appeal concerns the arrangements made under s 452 for the establishment in relation to each member of an special reserve fund. The taxpayer said that in relation to his special reserve fund the withdrawal was not automatic and that having elected to carry back his loss to 1986-87 it was fully utilised and no loss remained to be certified under s 453(4). He said that he had never seen the arrangements in question and that it was for the Revenue to prove them. The legislation and arrangements concerning underwriters 9. After that somewhat lengthy introduction we turn to the legislation, considering first ss 450 to 457 concerning underwriters, which have since been replaced by new provisions. 10. Section 450 provided for underwriters to be charged under Case I of Sch D on the profits of each Lloyd's year of account (including syndicate investment income) in the year of assessment in which the account ends. Subsection (3) precluded the one-year carry forward under s 380(2), permitting instead the carry back of unused losses for one year. 11. Section 452 provided as follows: '(1) If in the case of Lloyd's -- (a) arrangements are made for the setting up in relation to each underwriting member of such a special reserve fund as is referred to in the following provisions of this section and sections 453 to 456; and (b) the arrangements comply with the requirements of this section and sections 453 to 455, are approved by the Board and are certified by the Secretary of State to be in the public interest; then . . . the provisions of this section and sections 453 to 456 relating to taxation shall have effect in relation to any underwriting member.' The following subsections provided for various matters which the arrangements 'must' provide and others which they 'may' provide. Subsection (5) stated that the arrangements must secure that if an underwriter makes a profit 'he has the right to make' permissible payments into his special reserve fund. 12. Subsection (8) of s 452 provided as follows: 'In subsection (5) above "profit" means a profit computed in the manner in which the profits or gains of the business of the underwriting year in question would fall to be computed in accordance with section 450 if -- (a) income arising from the investments forming part of the premiums trust fund of the underwriter [his special reserve fund and his other Lloyd's funds] fell to be taken into account; and (b) all shares of the profits of the business and all charges related to those profits or to the income mentioned in paragraph (a) above . . . not otherwise taken into account, fell to be deducted.' 13. Section 453 covered payments out of the special reserve fund on account of losses. It provided as follows: '(1) The arrangements must be such as to secure that, if it is certified that the underwriter has sustained a loss in his business for an underwriting year subsequent to that which corresponds to the first year of assessment to which section 452(5) applies, there shall be made into his premiums trust fund, out of the capital of his special reserve fund or funds, payments the gross amount of which is equal in the aggregate to the certified amount of the loss.' Subsection (2) provided for the payments required by sub-s (1) to be reduced if the capital of the underwriter's special reserve fund is insufficient. Subsection (3) provided: 'In this section -- (a) "loss" means a loss computed in the manner in which the profits or gains of the business of the underwriting year in question would fall to be computed under section 452(8) . . .' Subsection (4) provided: 'In this section "certified" means certified by a certificate of the inspector, but -- (a) no certificate shall be given by the inspector until 30 days have elapsed from the date on which he has given notice to the underwriter or his personal representatives stating his intention to give a certificate and stating the amount which he proposes to specify as the amount of the loss . . .' Under sub-s (4)(a) and (b) the underwriter could appeal within 30 days of the notice and where he did so the inspector should not without his consent issue the certificate until after the hearing of the appeal. 14. We pause here to observe that in fact a certificate was issued on 7 July, the 30th day after the notice, which did not therefore comply with s 453(4)(a); this was of course before the taxpayer's letter giving notice of appeal. This error was discovered by Mr Williams shortly before the hearing and a new certificate dated 4 September 1995 was issued to regularise the position. In fact the withdrawal from the special reserve fund had been effected long before, albeit not in accordance with the letter of the statute. 15. The taxpayer did not make any submission based on this irregularity. His submission was that no certificate fell to be issued in respect of the 1989 account. 16. Section 454 dealt with the income tax consequences on payments being made into and out of the special reserve fund. Subsection (1) provided that the payment into the special reserve fund was deemed to be an annual payment under deduction of tax. Its effect therefore was to reduce the underwriter's higher rate tax liability but not his basic rate. Subsections (3) and (4) provided as follows: '(3) Where such a payment as is mentioned in section 453(1) is made out of a special reserve fund of an underwriter into a premiums trust fund of his by reason that he has sustained a loss for an underwriting year then, subject to section 453(7) -- (a) the payment shall be deemed for all income tax purposes -- (i) to be an annual payment chargeable to income tax by way of deduction and paid out of profits or gains brought into charge to income tax; and (ii) to have been payable and paid to the underwriter; and (iii) to have been payable and paid to him on the last day of the year of assessment corresponding to that underwriting year or, if he ceased to carry on his business before that day, on the last day on which he carried on his business; and (b) the sum actually paid shall be deemed for the purposes of sections 452 to 456 and for all income tax purposes to be a net amount corresponding to a gross amount from which income tax has been duly deducted for the year of assessment in which the payment is so deemed to have been payable and paid. (4) Where such a payment as is mentioned in section 453(1) is made out of a special reserve fund of an underwriter by reason that he has sustained a loss, relief in respect of the loss shall, so far as possible, be given by treating the loss as reducing the income represented by the payment.' 17. We now turn to the present case, leaving aside for the moment the particular issues arising under ss 381 and 835. 18. The taxpayer told us that he had never seen the arrangements referred to in s 452. We accept this. However, it is an indisputable fact that he made transfers into the special reserve fund. If he had not done so the issues before us could not have arisen. 19. Mr Williams produced copies of letters dated July 1991 on behalf of the Board of Inland Revenue approving new arrangements and on behalf of the Secretary of State for Trade and Industry certifying them under ss 452 and 455. He was not able to produce the letters showing what documents were sent for approval or certification; however it appears from the board's letter that copies of the special reserve fund trust deed and explanatory memorandum were submitted. Copies of these documents were produced to us. These, however, were not the documents in force when the taxpayer made his transfers into the special reserve fund since they only took effect from the 1988 account. The taxpayer told us (which we accept) that since he made no transfers into the special reserve fund after 1987 he was never asked to execute the new trust deed. 20. The Revenue were unable to produce the approval and certification letters for the arrangements prior to the 1988 account. 21. Mr Williams put in evidence a bundle headed 'New Special Reserve Fund Trust Deed' dated March 1991 apparently emanating from Lloyd's solvency and reporting department. In addition to the new documentation the bundle contained documents described as 'Current Special Reserve Fund Trust Deeds' and 'Current Explanatory Memoranda for Income Tax Year 1973-74'. 22. Although the position is far from satisfactory, we hold on the balance of probabilities that these documents were those operative when the taxpayer made his transfers to the special reserve fund and that he executed a special reserve fund trust deed in the terms of the document exhibited. Clause 5 provides: '5. If and so often as a certificate of loss shall be granted to the Member pursuant to paragraph 8 of the Tenth Schedule to the Income and Corporation Taxes Act, 1970 (or any . . . re-enactment thereof . . .) in respect of the underwriting business for any year ending on the 31st day of December the Trustees shall raise out of the Trust Fund a sum equal to the net amount arrived at by deducting from the loss so certified income tax thereon at the basic rate [to be held as part of the Members Premiums Trust Funds].' It is to be noted that the payment out is expressed to be conditional on the certificate under para 8 (the predecessor of s 453). 23. The explanatory memorandum stated at A.3 that the arrangements for 1973-74 and subsequent years which had been approved and certified under the Act were reproduced in part C of the memorandum. 24. Part C contained the following passages: '2. . . . The capital of the Fund can, so long as the underwriter continues to carry on business as a name, be withdrawn only for the purpose of meeting underwriting losses sustained by the underwriter. Losses will be certified by the Inspector of Taxes. Where a certified loss is incurred it will be met primarily by a payment out of the Fund into the underwriter's Premiums Trust Fund . . . 4. . . . Capital of any of the Funds will be withdrawn to meet a loss only if, and to the extent that, the results of all his underwriting activities for an underwriting year show a loss in total . . . 8. The provisions of [what are now ss 450 to 457 of the 1988 Act] shall have effect with regard to the income tax consequences of the arrangements . . .' 25. We hold that at the time when the taxpayer made his transfers into the special reserve fund the arrangements under s 452 were constituted by the trust deed executed by him and the arrangements reproduced in part C of the explanatory memorandum. In view of the wording of A.3 of the explanatory memorandum, the rest of that document is not part of the arrangements but merely seeks to explain them. It is what it says. 26. Mr Williams submitted that the arrangements provided for mandatory withdrawal in the event of a loss. He said that the arrangements having been approved by the board were binding on it. 27. We do not accept that the arrangements were capable of casting a duty on the inspector to issue a certificate under s 453, if he was not obliged to do so by the statute, except in the sense that the certificate procedure depended on arrangements having been set up. In any event the wording of the special reserve fund trust deed and part C of the memorandum did not purport to cast such a duty on the inspector. The trust deed stated (at cl 5) -- 'If . . . a certificate of loss shall be granted to the Member pursuant to [s 453].' Those words do not suggest that the granting of the certificate was to be automatic. Paragraph 3 of part B says -- ' . . . there will be paid out of the Fund'. However, that was not part of the arrangement. 28. In our judgment it is necessary to return to the statute to decide whether the certification, and thus the withdrawal, was mandatory. 29. The construction of s 453(1) presents problems. The section prescribed what the arrangements must secure 'if' a certificate was issued. In specifying what was to be certified it set preconditions as to the issue of a certificate, namely that a loss must have been sustained. Since s 453(1) was directed at what the arrangements must secure, it is not surprising that it did not in terms cast a duty on the inspector. 30. Some light is thrown on the issue of the certificate by sub-s (4) which was directed at the inspector rather than the arrangements. 31. Mr Williams pointed out that s 453(4)(a) was expressed in the negative; he said that fact presupposed that the issue of the certificate was automatic apart from the 30-day notice of intention and any appeal under para (b). He pointed out that there was no right of appeal against failure or refusal to issue a certificate. It could not be right to assume that the inspector was given an unfettered discretion as to whether to issue a certificate. He pointed out that there was no provision in the statute for the underwriter to request or apply for a certificate. He also pointed out that s 454(3) and (4) referred to a payment being made 'by reason that he has sustained a loss' and said that it was implicit that if a loss was sustained it would be certified. 32. It seems to us that in the final analysis the taxpayer's contention that certification was not automatic rests on the effect of his loss claim rather than on an analysis of s 453. We return to that later. 33. Leaving aside the taxpayer's arguments on the loss claim, we have concluded that if a loss as computed under s 452(8) was sustained it was implicit in s 453 that a certificate would be issued and that the inspector was under a duty to do this. The right of appeal was directed at a dispute over the amount or existence of the loss rather than whether, given that there was a loss, a certificate should have been issued. We agree that the inspector had no discretion in the matter. If he did have a discretion we would have expected the statute to give some guidance as to its exercise rather than leave the matter at large. 34. This brings us to the impact of the loss claim. The taxpayer said that having exercised his right to carry back the loss under s 381 there was no loss left to certify. This argument of course is directed at the precondition for the certificate, not at whether the issue of the certificate is mandatory if the precondition is satisfied. 35. However, if the taxpayer is correct in this submission his appeal succeeds. 36. Section 453(3)(a) gave a specific definition of 'loss' when used in that section. It meant the loss computed in the manner that profits were computed under s 452(8). Section 452(8) provided that profit means a profit as computed under s 450 but adding income arising from funds at Lloyd's other than syndicate funds and deducting charges related to the business of underwriting; the s 450 profit was the Case I profit including syndicate investment income. The s 452(8) loss was therefore the Case I loss less any other Lloyd's income plus any Lloyd's charges. 37. The s 381 loss was of course the Case I loss before the adjustments under s 452(8). 38. The taxpayer's argument was that, since he had elected to claim relief against 1986-87 tax in respect of his Case I Lloyd's loss for 1989-90, thereby utilising the entire loss, no unrelieved loss remained for the purposes of s 453(1). He said the 1989-90 loss was used up and no loss remained to trigger the special reserve fund withdrawal. 39. Mr Williams's response was that a loss is not extinguished when loss relief is claimed under s 381, it is merely relieved against tax. He pointed to the words in s 381(2) -- '. . . relief shall be given under subsection (1) above from income tax on an amount of the claimant's income equal to the amount of the loss . . .' He contrasted this with s 385(1) which provides for a loss to be carried forward and deducted from profits assessed to tax. He said that a loss under s 381 does not disappear when relief is given; it is not extinguished but is merely relieved against tax. 40. In our judgment the calculation of the loss for the purposes of s 453(1) was not affected by a claim for relief under s 381. Section 453(1) took effect if it was certified that the underwriter had 'sustained a loss' in the sense that it was suffered, experienced or undergone, regardless of whether or not any tax relief may have been claimed as a result; s 453(3)(a) specified how that loss was to be calculated referring to s 452(8) which in turn brought in s 450. It seems to us that the fact that the taxpayer had elected to claim relief under s 381 in respect of this Case I Lloyd's loss could not alter the fact that the computation for the purposes of s 453(1) showed a loss. 41. We hold that the inspector was correct in issuing his notice LL31 dated 7 June 1993 and that the appeal therefore under s 453(4)(b) fails. 42. We now return to the original ground of appeal which turns on the interaction of s 381 and s 454(4), considering it, however, on the basis that the notice LL31 dated 7 June 1993 correctly stated the loss for the purposes of s 453(1) as £18,799 gross. 43. As we pointed out earlier a certificate was issued on 7 July 1993 before 30 days had elapsed from the giving of a notice LL31. The taxpayer's members' agent was advised of the amount to be withdrawn and a payment of £10,080 was made out of the taxpayer's special reserve fund on the assumption that the certificate (LL32(Z)) was correctly issued. 44. The taxpayer's letter of 15 July 1995 disputing the withdrawal was received by the inspector after he had issued the LL32(Z) and presumably after the payment out of the special reserve fund had been made. 45. If the letter of 15 July 1993 had been received by the inspector before issue of the certificate LL32(Z), without the taxpayer's consent that certificate should not have been issued until after the hearing of the appeal (see s 453(4)(c)). 46. The hearing before us was conducted on the footing that, subject to the taxpayer's contentions on his appeal under s 453(4)(b) the certificate had been validly issued and the special reserve fund payment validly made. Put another way, the taxpayer did not submit that, even if he failed in his submission under s 453(4)(b), there had been no valid payment out of the special reserve fund because the certificate and payment were premature. 47. The taxpayer's submission on this aspect of the appeal was that, even if there was a valid payment from his special reserve fund, nevertheless he was still entitled to claim s 381 relief in priority to the relief under s 454(4). He accepted that in such circumstances he could not at that stage recover the tax deemed to have been paid under s 454(3); however, that did not concern him since he sustained a loss on the 1990 account also which he could carry back under the combined effect of ss 450(3) and 380 and which might otherwise be wasted. 48. Mr Williams accepted that the taxpayer had validly claimed loss relief under s 381 although he said that it was limited to the loss of £5,359 remaining after s 454(4) relief. 49. The starting point of the taxpayer's submissions was that s 381 gave him a clear right to carry back his loss. He said that a taxpayer is entitled to dictate the order of his tax relief relying on Butt (Inspector of Taxes) v Haxby [1983] STC 239 at 244, where Vinelott J said: 'The Revenue concede, I think rightly, that a taxpayer can claim relief in respect of the amount of a loss both under s 168 [of the Income and Corporation Taxes Act 1970, now s 380 of the 1988 Act] and under s 30 [of the Finance Act 1978, the predecessor to s 381 of the 1988 Act] and that if he claims under both sections he can dictate the order in which those sections are to be applied.' He submitted that the same principle applied in relation to relief under s 454(4). Furthermore he said that s 835(4) expressly entitles a taxpayer to take relief in the order giving the greatest reduction in his tax liability. 50. The taxpayer said that s 454(4) recognised that the loss and the special reserve fund payment might not be equal. He submitted that the natural meaning of the words 'relief in respect of the loss shall, so far as possible, be given by treating the loss as reducing the income represented by the payment' was that the loss to be relieved might be less than the income rather than the converse which would he argued be ungrammatical. He said that the only circumstances in which the loss could be less were that loss relief had been claimed under another provision, as in this case. 51. He submitted that s 454(4) was silent as to priority in giving relief and that there was no automatic provision that a tax refund be given on the special reserve fund payment. He submitted that the word 'shall' in s 454(4) was not mandatory, citing Elliss (Inspector of Taxes) v BP Oil Northern Ireland Refinery Ltd [1987] STC 52, where it was held that capital allowances were not compulsorily deductible although the statute used the word 'shall'. He relied on Walton J (see [1985] STC 722 at 734-735 and Bingham LJ [1987] STC 52 at 58). 52. Mr Williams submitted that the taxpayer's analysis of s 454(4) involved divorcing 'so far as possible' from 'relief'. Mr Williams said that s 454(4) involved a different mechanism for relief than that for relief under s 42(7) of the Taxes Management Act 1970 following a claim. 53. He said that in s 454(4) the first reference to 'loss' was a Case I loss whereas the subsequent references in s 454(4) to 'loss' were to losses as defined in s 453(3)(a). He said that the Case I loss might exceed the certified loss and produced a worked example where the underwriter had non-syndicate Lloyd's investment income; he also produced a worked example showing the Case I loss as less than the certified loss because of the existence of charges within s 452(8)(b). In such cases it would have been possible to relieve only part of the loss under s 454(4); the words 'so far as possible' would have effect. 54. Mr Williams said that ss 450 to 457 should be regarded not as a method of giving relief for tax but as enabling underwriters to provide for losses. They should be viewed in the light of the fact that income tax is annual. Income attributable to an special reserve fund withdrawal was treated under s 454(3)(a)(iii) as income of the year to which it related. The tax relief was also in that year. He submitted that unlike s 381, s 454(4) was not an elective relief; there was no provision for any act by the underwriter. He distinguished Butt (Inspector of Taxes) v Haxby on the grounds that s 454(4) contained no provision for election. He said that an underwriter could carry back any loss not relieved under s 454(4) instead of setting it against non-syndicate Lloyd's income of the year in question. He distinguished Elliss (Inspector of Taxes) v BP Oil Northern Ireland Refinery Ltd on similar grounds to Butt (Inspector of Taxes) v Haxby since in BP Oil the capital allowances were held to be elective. 55. He said that the word 'shall' in s 454(4) was mandatory particularly when added to 'so far as possible'. 56. He accepted that s 835(4) does apply to loss claims, but contended that s 454(4) was an express provision overriding s 835(4). 57. We do not find this second issue easy. 58. Although it turns on the interaction of s 454(4) with ss 381 and 835(4), in the ultimate analysis we consider that it depends on the construction of s 454(4). 59. If s 454(4) is to be construed as requiring that the loss there referred to must be relieved first 'so far as possible' against the deemed income under s 454(3), then the taxpayer cannot claim s 381 relief in priority either on the basis of Butt (Inspector of Taxes) v Haxby or s 835(4). If s 454(4) is not to be so construed, then it seems to us that the taxpayer is entitled to claim s 381 relief in priority. 60. It is convenient to set out again the words of that subsection: '(4) Where such a payment as is mentioned in s 453(1) is made out of a special reserve fund of an underwriter by reason that he has sustained a loss, relief in respect of the loss shall, so far as possible, be given by treating the loss as reducing the income represented by the payment.' 61. We consider first to which losses s 454(4) was referring. The use of the definite article before the word 'loss' where it appears for the second and third times in sub-s (4) indicates, on the normal use of grammar, that the 'loss' referred to there is the 'loss' first mentioned in the subsection. 62. The 'loss' first mentioned in s 454(4) was the loss sustained by the taxpayer by reason of which the payment mentioned in s 453(1) was made. 63. At first impression this 'loss' would seem to be the loss as defined in s 453(3)(a) for the purposes of s 453, since it was by reason of the fact that such 'loss' was certified under s 453(1) that the payment was made. The s 453 loss was not a pure trading loss but what might be called an adjusted loss, adjusted that is in accordance with s 453(3)(a). In occasional cases there might be a s 453 loss but not a trading loss, as Mr Williams demonstrated by his examples; this would, however, not be normal. 64. This interpretation is not, however, without difficulty. It is somewhat odd to refer to 'sustaining' such an adjusted loss which might not coincide with a trading loss. It is, however, to be noted that 'has sustained a loss' also appears in s 453(1). In the absence of special provision, such as with Case VI losses, the losses for which relief is given are trading losses. Unless s 454(4) is to be regarded as giving rise to an independent loss relief, the loss to be relieved must it seems to us be the trading loss. If s 454(4) is to be regarded as giving rise to an independent loss relief, the problem arises that there was no provision for its interaction with the provisions for trading losses which clearly apply for Lloyd's losses where there is no special reserve fund payment. It seems to us therefore that where 'loss' is referred to for the second and third times in s 454(4) it must have referred to trading loss rather than loss adjusted under s 453(3)(a). 65. As already pointed out the use of the definite article before 'loss' where it is used for the second and third times in s 454(4) suggests that it bears the same meaning where first used. It is to be remembered that the definition in s 453(3)(a) is expressed to be for that section. It seems to us therefore that the word 'loss' in s 454(4) refers throughout to a trading loss rather than to the adjusted loss under s 453(1). Although such a construction does not fit entirely happily with the first use of the word in s 454(4), it is more natural to refer to such a loss as 'sustained' than to an adjusted loss under s 453(3)(a) which may not be a real loss at all. 66. In the light of these observations we return to the construction of s 454(4). The debate centred around the phrase 'so far as possible' which is an adverbial phrase qualifying 'shall . . . be given'. 67. The taxpayer attached considerable importance to the word 'reduced' saying that it suggested that the deemed income representing the special reserve fund payment would be equal to or greater than the loss. If the statute contemplated that the deemed income might be greater, the taxpayer argued that this pointed to the possibility of the loss being used in another way first, as by s 381 relief. He said that the words 'so far as possible' contemplated this. 68. It is, however, clear that although the deemed income might in some circumstances exceed the trading loss, it would usually, as here, be less. In the latter cases the word 'reduced' must have meant 'reduced to nil'. 69. From this it follows that the words 'so far as possible' do on any view have a potential application quite apart from the effect of a s 381 claim, since in such an event it would not be possible to give full relief against the deemed income which would not be sufficient. 70. It seems to us that the phrase 'so far as possible' encompassed the possibility that the loss could not be fully relieved against the deemed income. However, it seems to us that the phrase was capable of covering a situation where for whatever reason the deemed income might not have been fully covered by the loss especially given the word 'reduced'. One such occasion might be that the loss had been otherwise utilised under s 381. 71. It is, however, necessary to consider the effect of s 454(4) as a whole rather than the meaning of particular words and phrases in it. 72. Mr Williams argued that it was implicit in the special reserve fund scheme that tax relief would be automatic on withdrawal, and that s 454(4) is designed to achieve this. While it is perfectly possible that there should be such a provision, we do not see that it is logically necessary. The total loss relief cannot ultimately exceed the actual loss; we do not see any reason in principle why an underwriter should not have been free to choose how he takes the loss (see eg Walton J in Elliss (Inspector of Taxes) v BP Oil Northern Ireland Refinery Ltd [1985] STC 722 at 733). 73. It does not seem to us that it is immediately obvious on studying s 454(4) by itself that it was intended to require that loss relief must be given first against the deemed income representing the special reserve fund payment. It would not have been difficult to make such an intention clearer. For example, such words as 'in priority to any other relief' could have been used. 74. However, when considering the construction to be placed on that subsection it is relevant to consider what other purpose it might have been designed to achieve. 75. It is clear beyond doubt that as a matter of general principle an underwriter was entitled to relief under s 380(1) in respect of his trading losses; s 450(3) referred in terms to relief under s 380, while providing that relief should not be given under sub-s (2) of that section. If an underwriter was deemed to have income by virtue of s 454(3), as a matter of general principle he would be entitled to use his relief for trading losses against that income. It was not necessary to include s 454(4) in order to achieve that effect. 76. If the purpose of s 454(4) was merely to provide that available loss relief should be given to the extent that was possible by setting it against the deemed income, so that the relief against the deemed income could not exceed the deemed income and the loss relief could not exceed the loss, that would be stating the obvious. 77. We conclude, therefore, that in spite of its imprecise wording the intention of s 454(4) must have been to provide that loss relief shall be given first to the extent that it is possible against the deemed income without the need for a claim. 78. We are fortified in this conclusion by a consideration of the legislative history of s 454(4). 79. The predecessor of s 454(4) was inserted into Sch 10 to the Income and Corporation Taxes Act 1970 as para 11(2A) by the Finance Act 1973. At the time when it was inserted the predecessor of s 381 (s 30 of the Finance Act 1978) had not been enacted. However, a trader could elect to carry a loss forward under s 171 of the Income and Corporation Taxes Act 1970 to a later year, and there was nothing to prevent him from doing this in priority to s 380 relief. 80. Under para 8 of Sch 10 to the Income and Corporation Taxes Act 1970 there were provisions for payments out of the special reserve fund in the same terms as under s 453 and under para 11(2) there were provisions (corresponding to s 454(3)) which provided for the payments to be treated as income. The relevant provisions in the Income and Corporation Taxes Act 1970, itself of course a consolidation Act, reproduced similar provisions to those in Sch 21 to the Income Tax Act 1952. There can be no doubt whatsoever that, prior to the insertion of para 11(2A) in 1973, an underwriter could set his Case I loss against that deemed income under what was then s 168, even though the predecessor of s 450(3) was only enacted in 1973. Most underwriters would wish to do this and would have found no attraction in the special reserve fund arrangements if they could not. In our opinion para 11(2A) cannot have been designed to give a relief to which an underwriter was not previously entitled. It seems clear to us that para 11(2A) must have been directed at the way in which relief was to be given. If it was designed to allow another relief (such as that under s 171) to be claimed in priority to the normal relief under s 168, it was inappropriately worded to achieve that effect and would seem to us to have been unnecessary. If it was merely intended to provide that relief under s 168 against the deemed income could not exceed that deemed income, it was stating the obvious. The other possibility is that it was intended to change the law by requiring that the loss should be set-off in priority against the deemed income without the need for a claim. It seems to us clear that this must have been the intention of the draftsman and thus of Parliament in 1973 and that such remains the intention of s 454(4). 81. We therefore conclude that although s 454(4) is far from clearly worded its effect is to require the loss to be deducted from the deemed income in priority to being used for any other loss relief, the relief being given without the need for a claim. That being the effect of s 454(4) neither Butt (Inspector of Taxes) v Haxby nor s 835(4) apply. 82. Finally, the taxpayer applied for an order for costs even if he should fail. 83. The power to award costs is contained in reg 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994, SI 1994/1811, under s 56C of the Taxes Management Act 1970. The power is exercisable if the tribunal 'is of the opinion that the party has acted wholly unreasonably in connection with the hearing'. We are not of such opinion. Indeed we would observe that a complex and difficult case was conducted before us with ability and good nature on both sides. DISPOSITION: Appeal dismissed